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Maruti Suzuki (MSIL)
Automobiles
Stock offers an attractive entry point. We believe the stock offers an attractive entry
point given cheap valuations (12.7X PE on FY2012E EPS) and strong earnings growth
outlook (17% yoy in FY2012E). 3QFY11 results were 4% ahead of our estimates driven
by cost-cutting initiatives. We maintain our BUY rating but cut target price to Rs1,460
(from Rs1,701) due to (1) 2-6% cut in earnings over FY2011-2013E and (2) cut in target
multiple to 15X (from 17X earlier) on FY2012E EPS.
3QFY11 profits were 4% ahead of our estimates
3QFY11 profits of Rs5,652 mn were 4% ahead of our estimates. Net sales were 2.5% lower than
our forecasts driven by (1) Rs1,000/vehicle qoq increase in discounts due to festive season and (2)
1.5% qoq decline in export realizations. Raw material costs to net sales increased by 100 bps qoq
primarily due to adverse impact of currency (sharp appreciation of yen vs rupee) and slight increase
in raw material costs.
Staff costs increased by 48% qoq due to upward revision in salaries and full impact of arrears
related to previous years were also recognized in this quarter. Company indicated that 55 bps
impact on EBITDA margins was due to arrears related to previous quarter; hence salary costs will go
down in next quarter and is likely to remain at 2-2.2% of net sales going forward.
Other expenses to net sales declined by 80 bps qoq due to (1) 40 bps decline in selling and
administration expenses and (2) 30 bps decline in royalty expenses which was due to lower exports
in the product mix (export sales have higher royalties than domestic sales). EBITDA margins of
9.5% were 30 bps ahead of our estimates.
We revise our earnings downwards by 3-6% over FY2011-13E
We cut our earnings estimates over FY2011-13E factoring in higher raw material cost inflation and
increase in staff costs due to upward revision in salaries. We have marginally increased our volume
estimates while average realizations have increased by 2-4% over FY2012-13E as we expect the
company to take price increases (following their competitors) and factor in improvement in product
mix. Maruti’s capacity has increased to 1.4 mn units vs 1.3 mn units from April 2011 which is
earlier than our expectations and this could help the company reduce the waiting periods on Swift
and Dzire models, thus improving product mix.
We cut our target price to Rs1,460 based on 15X PE (from 17X earlier) on our FY2012E
consolidated EPS of Rs97. We have cut our target multiple due to increase in macro headwinds on
the auto sector (rise in interest costs, fuel costs and sharp rise in raw materials).
3QFY11 results were 4% above our estimates
3QFY11 profits of Rs5,652 mn were 4% ahead of our estimates. Net sales were 2.5% lower
than forecasts driven by (1) Rs1,000/vehicle qoq increase in discounts due to festive season
and (2) 1.5% qoq decline in export realizations. Export realizations have declined by 19%
qoq in 9MFY11 due to product mix change and currency impact. The company did not take
any price increase during the quarter.
Raw material costs to net sales increased by 100 bps qoq primarily due to adverse impact of
currency (sharp appreciation of yen vs rupee) and slight increase in raw material costs.
Staff costs increased by 48% qoq due to upward revision in salaries and full impact of
arrears related to previous years that were also recognized in this quarter. The company
indicated that a 55 bps impact on EBITDA margins was due to arrears related to previous
quarter; hence salary costs will go down in next quarter and is likely to remain at 2-2.2% of
net sales going forward.
Other expenses to net sales declined by 80 bps qoq due to (1) 40 bps decline in selling and
administration expenses and (2) 30 bps decline in royalty expenses which was due to lower
exports in the product mix (export sales have higher royalties than domestic sales). EBITDA
margins of 9.5% were 30 bps ahead of our estimates.
Key highlights of the conference call
Management indicated that volume growth is expected to remain robust for 4QFY11E
and they are not witnessing any visible signs of slowdown in volumes as yet. Company
has also increased its capacity from 1.3 mn to 1.4 mn which will be available from
April 2011. Company will have sufficient capacities to meet demand (1.65 mn by
October 2011 and 1.9 mn by April 2012), in our view, which will aid improvement in
product mix as Swift and Swift Dzire have waiting periods.
Export realizations are under pressure and have declined by 19% yoy in 9MFY11 due to
adverse mix and currency impact. Company has hedged Euro exposure for 1HFY12E but
kept the dollar export exposure unhedged as of now. 70% of current exports are dollar
denominated. Company has not taken any price increases on exports as well.
Company has taken an average 0.8% price hike in mid-January 2011 and believes raw
material cost pressure is a concern. We believe EBITDA margins are expected to
marginally improve by 50 bps qoq in 4QFY11E primarily excluding one-time impact on
staff cost due to previous years arrears which is unlikely to hit the P&L in 4QFY11E.
Company also indicated that they have no plans to launch diesel models below Swift
price point as yet while competition has already launched diesel models. We believe this
could be a pressure point in the near term given the differential between diesel and petrol
prices have increased.
Company also stated that raw material costs got impacted by 1.2% yoy in 3QFY11 due to
adverse impact of currency (appreciating yen vs rupee and depreciating Euro vs rupee).
Company has hedged direct yen exposure (~12% of net sales) till February 2011 but has
not taken any hedges beyond February 2011 as they expect yen to depreciate vs rupee.
Total yen imports (direct + indirect) as a % of sales is 23% currently.
We revise earnings downwards by 3-6% over FY2011-13E
We cut our earnings estimates over FY2011-13E factoring in higher raw material cost
inflation and increase in staff costs due to upward revision in salaries. However, we have
marginally increased our volume estimates because December retail volumes of 138,000
were much ahead of our estimates and we do not see meaningful impact on passenger car
volume growth in FY2012E due to higher fuel and interest expenses because of robust
employment outlook.
We have also increased our average realizations by 2-4% over FY2012-13E due to
improvement in product mix and we expect company to take some price increases to offset
sharp rise in raw material costs. In FY2011E, Maruti has lagged competitors in terms of
taking price increase but we believe competition margins are much lower than Maruti and
they will be left with no choice but to take price increases in this environment which should
give headroom to Maruti to increase prices without losing meaningful market share. We
have not factored in any benefit of yen depreciation in our estimates and if yen moves as per
company expectations, there could be upside risk to our estimates.
Our target price of Rs1,460 is based on 15X PE on FY2012E consolidated EPS (Rs92/share of
parent EPS and Rs5/share of subsidiary EPS). We have cut our target multiple from 17X to
15X due to increase in macro headwinds related to auto sector (rising interest costs, sharp
rise in raw material costs and sharp rise in fuel prices). We believe Maruti could still trade at
slight premium to historical average driven by 17% yoy increase in earnings in FY2012E
(highest among our coverage universe).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki (MSIL)
Automobiles
Stock offers an attractive entry point. We believe the stock offers an attractive entry
point given cheap valuations (12.7X PE on FY2012E EPS) and strong earnings growth
outlook (17% yoy in FY2012E). 3QFY11 results were 4% ahead of our estimates driven
by cost-cutting initiatives. We maintain our BUY rating but cut target price to Rs1,460
(from Rs1,701) due to (1) 2-6% cut in earnings over FY2011-2013E and (2) cut in target
multiple to 15X (from 17X earlier) on FY2012E EPS.
3QFY11 profits were 4% ahead of our estimates
3QFY11 profits of Rs5,652 mn were 4% ahead of our estimates. Net sales were 2.5% lower than
our forecasts driven by (1) Rs1,000/vehicle qoq increase in discounts due to festive season and (2)
1.5% qoq decline in export realizations. Raw material costs to net sales increased by 100 bps qoq
primarily due to adverse impact of currency (sharp appreciation of yen vs rupee) and slight increase
in raw material costs.
Staff costs increased by 48% qoq due to upward revision in salaries and full impact of arrears
related to previous years were also recognized in this quarter. Company indicated that 55 bps
impact on EBITDA margins was due to arrears related to previous quarter; hence salary costs will go
down in next quarter and is likely to remain at 2-2.2% of net sales going forward.
Other expenses to net sales declined by 80 bps qoq due to (1) 40 bps decline in selling and
administration expenses and (2) 30 bps decline in royalty expenses which was due to lower exports
in the product mix (export sales have higher royalties than domestic sales). EBITDA margins of
9.5% were 30 bps ahead of our estimates.
We revise our earnings downwards by 3-6% over FY2011-13E
We cut our earnings estimates over FY2011-13E factoring in higher raw material cost inflation and
increase in staff costs due to upward revision in salaries. We have marginally increased our volume
estimates while average realizations have increased by 2-4% over FY2012-13E as we expect the
company to take price increases (following their competitors) and factor in improvement in product
mix. Maruti’s capacity has increased to 1.4 mn units vs 1.3 mn units from April 2011 which is
earlier than our expectations and this could help the company reduce the waiting periods on Swift
and Dzire models, thus improving product mix.
We cut our target price to Rs1,460 based on 15X PE (from 17X earlier) on our FY2012E
consolidated EPS of Rs97. We have cut our target multiple due to increase in macro headwinds on
the auto sector (rise in interest costs, fuel costs and sharp rise in raw materials).
3QFY11 results were 4% above our estimates
3QFY11 profits of Rs5,652 mn were 4% ahead of our estimates. Net sales were 2.5% lower
than forecasts driven by (1) Rs1,000/vehicle qoq increase in discounts due to festive season
and (2) 1.5% qoq decline in export realizations. Export realizations have declined by 19%
qoq in 9MFY11 due to product mix change and currency impact. The company did not take
any price increase during the quarter.
Raw material costs to net sales increased by 100 bps qoq primarily due to adverse impact of
currency (sharp appreciation of yen vs rupee) and slight increase in raw material costs.
Staff costs increased by 48% qoq due to upward revision in salaries and full impact of
arrears related to previous years that were also recognized in this quarter. The company
indicated that a 55 bps impact on EBITDA margins was due to arrears related to previous
quarter; hence salary costs will go down in next quarter and is likely to remain at 2-2.2% of
net sales going forward.
Other expenses to net sales declined by 80 bps qoq due to (1) 40 bps decline in selling and
administration expenses and (2) 30 bps decline in royalty expenses which was due to lower
exports in the product mix (export sales have higher royalties than domestic sales). EBITDA
margins of 9.5% were 30 bps ahead of our estimates.
Key highlights of the conference call
Management indicated that volume growth is expected to remain robust for 4QFY11E
and they are not witnessing any visible signs of slowdown in volumes as yet. Company
has also increased its capacity from 1.3 mn to 1.4 mn which will be available from
April 2011. Company will have sufficient capacities to meet demand (1.65 mn by
October 2011 and 1.9 mn by April 2012), in our view, which will aid improvement in
product mix as Swift and Swift Dzire have waiting periods.
Export realizations are under pressure and have declined by 19% yoy in 9MFY11 due to
adverse mix and currency impact. Company has hedged Euro exposure for 1HFY12E but
kept the dollar export exposure unhedged as of now. 70% of current exports are dollar
denominated. Company has not taken any price increases on exports as well.
Company has taken an average 0.8% price hike in mid-January 2011 and believes raw
material cost pressure is a concern. We believe EBITDA margins are expected to
marginally improve by 50 bps qoq in 4QFY11E primarily excluding one-time impact on
staff cost due to previous years arrears which is unlikely to hit the P&L in 4QFY11E.
Company also indicated that they have no plans to launch diesel models below Swift
price point as yet while competition has already launched diesel models. We believe this
could be a pressure point in the near term given the differential between diesel and petrol
prices have increased.
Company also stated that raw material costs got impacted by 1.2% yoy in 3QFY11 due to
adverse impact of currency (appreciating yen vs rupee and depreciating Euro vs rupee).
Company has hedged direct yen exposure (~12% of net sales) till February 2011 but has
not taken any hedges beyond February 2011 as they expect yen to depreciate vs rupee.
Total yen imports (direct + indirect) as a % of sales is 23% currently.
We revise earnings downwards by 3-6% over FY2011-13E
We cut our earnings estimates over FY2011-13E factoring in higher raw material cost
inflation and increase in staff costs due to upward revision in salaries. However, we have
marginally increased our volume estimates because December retail volumes of 138,000
were much ahead of our estimates and we do not see meaningful impact on passenger car
volume growth in FY2012E due to higher fuel and interest expenses because of robust
employment outlook.
We have also increased our average realizations by 2-4% over FY2012-13E due to
improvement in product mix and we expect company to take some price increases to offset
sharp rise in raw material costs. In FY2011E, Maruti has lagged competitors in terms of
taking price increase but we believe competition margins are much lower than Maruti and
they will be left with no choice but to take price increases in this environment which should
give headroom to Maruti to increase prices without losing meaningful market share. We
have not factored in any benefit of yen depreciation in our estimates and if yen moves as per
company expectations, there could be upside risk to our estimates.
Our target price of Rs1,460 is based on 15X PE on FY2012E consolidated EPS (Rs92/share of
parent EPS and Rs5/share of subsidiary EPS). We have cut our target multiple from 17X to
15X due to increase in macro headwinds related to auto sector (rising interest costs, sharp
rise in raw material costs and sharp rise in fuel prices). We believe Maruti could still trade at
slight premium to historical average driven by 17% yoy increase in earnings in FY2012E
(highest among our coverage universe).
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