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Maruti Suzuki (Maruti) reported its 3QFY2011 results, which were marginally
below our estimates largely due to adverse product mix, drop in average net
realisation and one-time expenses related to employee costs. We broadly
maintain our volume estimates; however, we have revised our earnings estimates
marginally downwards to factor in lower-than-expected performance during
3QFY2011. Owing to the recent correction in the stock price, we recommend Buy
on the stock.
Operating performance marginally lower than estimates: For 3QFY2011, Maruti
registered 26.5% yoy growth in net sales to `9,494cr (`7,503cr), slightly lower
than our estimates, aided by a 28.2% yoy jump in volumes. However, average net
realisation declined marginally by 1.3% during the quarter due to inferior product
mix and currency impact on export realisation. EBITDA margins declined by
561bp yoy to 9.5% against our estimates of 10.4% due to higher raw-material
costs (up 353bp yoy) and increased royalty payments (up 150bp yoy) to 5.2% of
net sales (3.7% in 3QFY2010). Further, higher employee expenses due to onetime
costs related to restructuring of employee compensation impacted margins.
Net profit at `565cr recorded a 17.8% yoy decline, 6% below our expectations.
Higher other operating income (up 29% yoy) and other income (up 41% yoy)
helped restrict the further decline in net profit.
Outlook and valuation: At `1,234, Maruti is trading at 16.1x and 12.2x FY2011E
and FY2012E earnings, respectively. We model a 19.2% volume and 9.8%
earnings CAGR for the company for FY2010–12E. Owing to the recent decline in
the stock price, we recommend Buy on the stock with a Target Price of `1,515, at
which level it would trade at 15x FY2012E earnings.
Subdued performance at the operating front: For 3QFY2011, Maruti’s EBITDA
margin came in 89bp below our estimates at 9.5%, a decline of 561bp yoy,
largely owing to a 353bp yoy increase in raw-material cost to 76.6% (73.1%) of
net sales. Further, higher other expenditure and employee costs impacted yoy
EBITDA margins during the quarter. The higher employee cost included one-time
cost of `51cr related to restructuring of employee compensation structure
(recurring impact of ~20bp and one-time impact of ~55bp). Overall, operating
profit declined by 20.5% yoy to `902cr (`1,134cr).
Net profit declines 17.8% yoy: Maruti reported net profit of `565cr, down 17.8%
yoy, as against our estimate of `601cr, led by weak operating performance
despite a higher-than-expected increase in other income during 3QFY2011.
Moreover, lower tax outgo during 3QFY2011 restricted the further fall in net profit.
Conference call – Key highlights
Management expects the demand scenario to remain strong in 4QFY2011E,
driven by strong consumer sentiment. However, the company is cautious and
believes that higher financing costs and increased fuel prices will impact
demand in the long run. Maruti has increased its production capacity to
1.3mn units (from 1.2mn) through de-bottlenecking exercise. The capacity is
set to increase further to 1.4mn units from 1HFY2012E. Total annual
production capacity will increase to 1.75mn units by FY2012–13E.
• Manesar plant B: Capacity of 2.5lakh units operational by 3QFY2012.
• Manesar Plant C: Capacity of 2.5lakh units operational by early FY2013.
Realisation on the exports front was impacted due to depreciation of Euro;
however, in the domestic markets, realisation was lower on account of adverse
product mix and discounts.
Economic slowdown and lack of scrappage incentives affected exports volume.
Management intends to de-risk exports and, as such, is concentrating on
non-European markets. Australia, New Zealand, Indonesia, Malaysia and
Brunei are the countries in which the company is testing its products. During
3QFY2011, 70% of exports were to non-European countries. The company
generated exports revenue of `839cr and `2,961cr in 3QFY2011 and
9MFY2011, respectively.
Sales of CNG models constitute ~20% of overall sales in the markets, where
CNG models have been launched (NCR, Gujarat, Mumbai and certain parts
of Andhra Pradesh).
Rural sales now account for ~20% of overall sales volumes. Sales contribution
from top 10 cities stands at ~40% of overall volume.
Average discounts during the quarter were higher by ~`1,000 on a yoy basis
to ~`10,700/vehicle. Going forward, discounts are expected to normalise.
Maruti is seeing strong demand for its Dzire model and despite higher
production volume, the waiting period stands at more than two months.
Royalty payments were down by 30bp qoq due to a decline in exports and
higher proportion of non-royalty bearing export vehicles.
Management is considering hedging its Euro exposure for FY2012E and is
contemplating pricing action on the exports front. The company expects Yen to
depreciate going ahead and, hence, would keep the Yen exposure open.
During the quarter, Maruti incurred a one-time cost towards employee
expenses, which was related to restructuring in compensation structure. Higher
employee expenses are likely to have an additional impact of 20bp on an
annualised basis. Management expects employee expenses to remain at
2.0–2.2% of net sales in the future.
Investment arguments
Per capita near inflexion point for car demand: Car penetration in India was
estimated at around 12 vehicles/1,000 people in FY2009 compared to
around 21 vehicles/1,000 people in China. Moreover, India’s PPP-based per
capita is estimated to approach US $5,000 over the next 4–5 years, which is
expected to be the inflexion point for the country’s car demand. Increasing
penetration is estimated to drive ~13% CAGR in domestic volumes over
FY2010–12E. Further, Maruti has a sizeable competitive advantage over new
foreign entrants due to its widespread distribution network (nearly 2,767 and
681 service and sales outlets, respectively), which is not easy to replicate.
Suzuki focusing to make Maruti a small car-manufacturing hub: Suzuki Japan
is making Maruti a manufacturing hub to cater to the increasing global
demand for small cars, due to rising fuel prices and stricter emission
standards. Thus, we believe there is a huge potential for the company to
increase its market share in the export market. Moreover, R&D capabilities, so
far largely housed at Suzuki Japan, are progressively moving to Maruti.
The company is aiming to achieve full model change capabilities over the next
couple of years, which will enable it to launch new models and variants at a
much faster pace, which should ideally reduce its royalty payment in the long
run (2–3 years).
Outlook and valuation
We broadly maintain our volume estimates; however, we have revised our
earnings estimates marginally downwards to factor in the lower-than-expected
performance during 3QFY2011. We model a 19.2% volume and 9.8% earnings
CAGR for the company for FY2010–12E.
At `1,234, Maruti is trading at 16.1x and 12.2x FY2011E and FY2012E earnings
of `76.6 and `101, respectively. Owing to the recent decline in the stock price, we
recommend Buy on the stock with a Target price of `1,515, at which level it would
trade at 15x FY2012E earnings.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki – 3QFY2011 Result Update
Angel Broking recommends a Buy on Maruti Suzuki with a Target Price of Rs. 1,515.
Maruti Suzuki (Maruti) reported its 3QFY2011 results, which were marginally
below our estimates largely due to adverse product mix, drop in average net
realisation and one-time expenses related to employee costs. We broadly
maintain our volume estimates; however, we have revised our earnings estimates
marginally downwards to factor in lower-than-expected performance during
3QFY2011. Owing to the recent correction in the stock price, we recommend Buy
on the stock.
Operating performance marginally lower than estimates: For 3QFY2011, Maruti
registered 26.5% yoy growth in net sales to `9,494cr (`7,503cr), slightly lower
than our estimates, aided by a 28.2% yoy jump in volumes. However, average net
realisation declined marginally by 1.3% during the quarter due to inferior product
mix and currency impact on export realisation. EBITDA margins declined by
561bp yoy to 9.5% against our estimates of 10.4% due to higher raw-material
costs (up 353bp yoy) and increased royalty payments (up 150bp yoy) to 5.2% of
net sales (3.7% in 3QFY2010). Further, higher employee expenses due to onetime
costs related to restructuring of employee compensation impacted margins.
Net profit at `565cr recorded a 17.8% yoy decline, 6% below our expectations.
Higher other operating income (up 29% yoy) and other income (up 41% yoy)
helped restrict the further decline in net profit.
Outlook and valuation: At `1,234, Maruti is trading at 16.1x and 12.2x FY2011E
and FY2012E earnings, respectively. We model a 19.2% volume and 9.8%
earnings CAGR for the company for FY2010–12E. Owing to the recent decline in
the stock price, we recommend Buy on the stock with a Target Price of `1,515, at
which level it would trade at 15x FY2012E earnings.
Drop in average net realisation restricts top-line growth: Maruti reported 26.5%
yoy top-line growth to `9,494cr, which was marginally below our expectation of
`9,708cr. Growth was driven largely by a ~28.2% yoy jump in volumes. Top-line
performance was also aided by a substantial ~29.3% yoy increase in other
operating income at `168cr (`130cr). During the quarter, average net realisation
marginally declined by 1.3% yoy at `2.81lakh (`2.84lakh), due to adverse product
mix and currency (Euro) impact on export revenue, which stood at `839cr (`992cr
in 2QFY2011 and `1,314cr in 3QFY2010), while average export realisation
declined by ~20.3% yoy to `2.69lakh (`3.36lakh in 3QFY2010).
Subdued performance at the operating front: For 3QFY2011, Maruti’s EBITDA
margin came in 89bp below our estimates at 9.5%, a decline of 561bp yoy,
largely owing to a 353bp yoy increase in raw-material cost to 76.6% (73.1%) of
net sales. Further, higher other expenditure and employee costs impacted yoy
EBITDA margins during the quarter. The higher employee cost included one-time
cost of `51cr related to restructuring of employee compensation structure
(recurring impact of ~20bp and one-time impact of ~55bp). Overall, operating
profit declined by 20.5% yoy to `902cr (`1,134cr).
Net profit declines 17.8% yoy: Maruti reported net profit of `565cr, down 17.8%
yoy, as against our estimate of `601cr, led by weak operating performance
despite a higher-than-expected increase in other income during 3QFY2011.
Moreover, lower tax outgo during 3QFY2011 restricted the further fall in net profit.
Conference call – Key highlights
Management expects the demand scenario to remain strong in 4QFY2011E,
driven by strong consumer sentiment. However, the company is cautious and
believes that higher financing costs and increased fuel prices will impact
demand in the long run. Maruti has increased its production capacity to
1.3mn units (from 1.2mn) through de-bottlenecking exercise. The capacity is
set to increase further to 1.4mn units from 1HFY2012E. Total annual
production capacity will increase to 1.75mn units by FY2012–13E.
• Manesar plant B: Capacity of 2.5lakh units operational by 3QFY2012.
• Manesar Plant C: Capacity of 2.5lakh units operational by early FY2013.
Realisation on the exports front was impacted due to depreciation of Euro;
however, in the domestic markets, realisation was lower on account of adverse
product mix and discounts.
Economic slowdown and lack of scrappage incentives affected exports volume.
Management intends to de-risk exports and, as such, is concentrating on
non-European markets. Australia, New Zealand, Indonesia, Malaysia and
Brunei are the countries in which the company is testing its products. During
3QFY2011, 70% of exports were to non-European countries. The company
generated exports revenue of `839cr and `2,961cr in 3QFY2011 and
9MFY2011, respectively.
Sales of CNG models constitute ~20% of overall sales in the markets, where
CNG models have been launched (NCR, Gujarat, Mumbai and certain parts
of Andhra Pradesh).
Rural sales now account for ~20% of overall sales volumes. Sales contribution
from top 10 cities stands at ~40% of overall volume.
Average discounts during the quarter were higher by ~`1,000 on a yoy basis
to ~`10,700/vehicle. Going forward, discounts are expected to normalise.
Maruti is seeing strong demand for its Dzire model and despite higher
production volume, the waiting period stands at more than two months.
Royalty payments were down by 30bp qoq due to a decline in exports and
higher proportion of non-royalty bearing export vehicles.
Management is considering hedging its Euro exposure for FY2012E and is
contemplating pricing action on the exports front. The company expects Yen to
depreciate going ahead and, hence, would keep the Yen exposure open.
During the quarter, Maruti incurred a one-time cost towards employee
expenses, which was related to restructuring in compensation structure. Higher
employee expenses are likely to have an additional impact of 20bp on an
annualised basis. Management expects employee expenses to remain at
2.0–2.2% of net sales in the future.
Investment arguments
Per capita near inflexion point for car demand: Car penetration in India was
estimated at around 12 vehicles/1,000 people in FY2009 compared to
around 21 vehicles/1,000 people in China. Moreover, India’s PPP-based per
capita is estimated to approach US $5,000 over the next 4–5 years, which is
expected to be the inflexion point for the country’s car demand. Increasing
penetration is estimated to drive ~13% CAGR in domestic volumes over
FY2010–12E. Further, Maruti has a sizeable competitive advantage over new
foreign entrants due to its widespread distribution network (nearly 2,767 and
681 service and sales outlets, respectively), which is not easy to replicate.
Suzuki focusing to make Maruti a small car-manufacturing hub: Suzuki Japan
is making Maruti a manufacturing hub to cater to the increasing global
demand for small cars, due to rising fuel prices and stricter emission
standards. Thus, we believe there is a huge potential for the company to
increase its market share in the export market. Moreover, R&D capabilities, so
far largely housed at Suzuki Japan, are progressively moving to Maruti.
The company is aiming to achieve full model change capabilities over the next
couple of years, which will enable it to launch new models and variants at a
much faster pace, which should ideally reduce its royalty payment in the long
run (2–3 years).
Outlook and valuation
We broadly maintain our volume estimates; however, we have revised our
earnings estimates marginally downwards to factor in the lower-than-expected
performance during 3QFY2011. We model a 19.2% volume and 9.8% earnings
CAGR for the company for FY2010–12E.
At `1,234, Maruti is trading at 16.1x and 12.2x FY2011E and FY2012E earnings
of `76.6 and `101, respectively. Owing to the recent decline in the stock price, we
recommend Buy on the stock with a Target price of `1,515, at which level it would
trade at 15x FY2012E earnings.
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