UBS:: Maruti Suzuki India- Buy into the weakness

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UBS Investment Research
Maruti Suzuki India
Buy into the weakness
􀂄 Upgrade to Buy (from Neutral) on attractive valuations
We upgrade Maruti to a Buy from Neutral as we believe potential headwinds of: 1)
slowing growth; 2) near-term margin pressure; and 3) higher competition, are now
largely in the price. We however believe the margins are bottoming out and
valuations have turned attractive. The stock has underperformed the market by 8%
and declined 13% in last three months. We remain structurally positive on car
growth in India over the medium term, of which Maruti will be a beneficiary.

􀂄 Expect growth to be slow in FY12, but strong rural growth to help
We now forecast 12% YoY growth for Maruti in FY12 vs 15% earlier, following
higher-than-expected growth in FY11 and increasing interest rates. Rural (outside
Top 100 cities) is now meaningful for Maruti, accounting for 19% of H1 FY11
volumes. We believe Maruti’s strong distribution network is likely to help it tap
strong rural growth. We however, assume Maruti’s volume growth to grow slower
than industry at 15% to factor in increasing competition.
􀂄 Yen strength likely to remain a pressure point for margins
We lower our EBITDA margin estimates for FY11/12 from 10.2%/10.4% to
9.7%/10.1% driven by our assumption of weaker margins in H2 FY11 due to
limited hedges on yen imports and higher commodity costs. We expect these to be
partly offset by price increases by the company.
􀂄 Valuation: upgrade to Buy (from Neutral), PT Rs1,700 (unchanged)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool, assuming a WACC of 11.3%.


Valuation
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool with a WACC of
11.3%. We maintain our price target of Rs1,700. Our 12-month price target
implies Maruti will trade at 14.8x FY13 EPS estimates.