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Maruti Suzuki ---------------------------------------------------------------Upgrade to OUTPERFORM
3Q11 disappoints but current valuations factor in our concerns
● Maruti’s 3Q11 results were below estimates due to lower margins
(-100 bp versus estimate). Adverse currency moves hurt export
realisation and inflated input costs more than expected.
● Maruti’s core franchise remains strong, with market share
rebounding to 52% in the Dec. quarter. While some share loss is
inevitable, the current strength is comforting. With capacity
constraints being addressed, Maruti can grow volumes strongly
(+15% in domestic) in FY12E as well. However, export strategy,
especially the focus on creating new but small markets, remains a
concern.
● Despite weak reported numbers, we believe that the core
profitability is very strong (currency and royalty have taken away c
450 bp in two years). From hereon, we expect operating leverage
and pricing power to help margins improve 80 bp in FY11-13E.
● We raise our revenue forecasts (2-3% for FY11-13E), but cut
margin assumptions (60-70 bp), leading to a 4-5% decline in
FY11-13E EPS. Our target price, as a result, drops to Rs1,514.
● Post the recent underperformance, the stock looks attractive at
13x FY12E EPS. Upgrade to OUTPERFORM.
Maruti 3Q FY11 results below estimates
Maruti (MRTI) reported 3Q11 EBITDA at Rs9 bn, 13% below
estimates, driven by both lower revenues (-3% versus estimate) and
margins (-100 bp versus estimate). PAT, as a result, missed our
forecast by 12%.
Most of the margin miss is explained by higher raw material costs
which were impacted by adverse currency movements. While 2Q11
was relatively unaffected, the impact of a sharp appreciation in yen (c
8%) came through with a lag. MRTI has kept its yen position
unhedged beyond Feb., expecting a reversal in currency.
Exports hit by lower realisations and poor mix
Led by continued weakness in Europe, export volumes dropped 20%
YoY in 3Q11, while revenue dropped 36%. Export realisations have
been hit both on account of: (1) a worsening mix – non-European
markets constituted 70% of exports in 3Q11 (30% in FY10, 60% in
2Q11) which have lower realisations, (2) adverse forex impact – lower
realisations both in Euro and USD (largely unhedged). We note that,
despite the impact on realisations, MRTI has been unable to take any
pricing action in export markets. The lack of control over export
profitability and channelling of much needed capacity to this business
remain a concern.
Domestic business continues to be robust
Maruti’s domestic volumes have grown 31% YTD, in line with the
industry. Concerns on market share loss due to increased competition
have remained largely unfounded. We see threat from some of the
competitors’ recent launches already receding. While we maintain
market share loss is inevitable, we take comfort from strength of
Maruti’s franchise on display so far. While there are concerns on rising
interest rates and availability of financing, there are no signs of
slowdown in the market as of now. We note that historically there has
been little correlation between car demand growth and interest rates.
Helped by efficiency-driven initiatives, the company expects to begin
FY12 with an increased capacity of 1.4 mn units p.a. (1.2 mn in
FY11). This, in addition to a capacity expansion of another 250,000 in
2H FY12E, places MRTI in a comfortable position for a 15-20%
volume growth next year (we forecast 14% growth in FY12E).
Upgrade to OUTPERFORM
We raise our domestic volume estimates (about 4% FY11-13E) but
cut our export realisations for FY11. We also reduce our margin
assumptions by 60-70 bp, leading to a 4-5% drop in our FY11-13E
EPS estimates. Our target price (based on 16x FY12E core EPS),
therefore, drops to Rs1,514.
We note that Maruti’s core franchise, in terms of domestic market
share and profitability are very strong. We remain optimistic on the
domestic business despite the influx of competition. Reported margins
have been impacted by externalities such as royalty (c150 bp increase
versus earlier, recurring) and currency (negative impact of c 300-
400 bp, volatile). The strength in core franchise makes us optimistic
on long-term profitable growth. While we remain concerned on
Maruti’s export strategy, we believe the current valuations sufficiently
factor in these concerns. The stock has underperformed the market by
12% in the past three months and currently trades at a 12% discount
to the broader index (close to historic average). At 13x FY12E EPS
and forecast earnings at 18% CAGR (FY11-13E), we find the stock
attractive. Upgrade to OUTPERFORM.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki ---------------------------------------------------------------Upgrade to OUTPERFORM
3Q11 disappoints but current valuations factor in our concerns
● Maruti’s 3Q11 results were below estimates due to lower margins
(-100 bp versus estimate). Adverse currency moves hurt export
realisation and inflated input costs more than expected.
● Maruti’s core franchise remains strong, with market share
rebounding to 52% in the Dec. quarter. While some share loss is
inevitable, the current strength is comforting. With capacity
constraints being addressed, Maruti can grow volumes strongly
(+15% in domestic) in FY12E as well. However, export strategy,
especially the focus on creating new but small markets, remains a
concern.
● Despite weak reported numbers, we believe that the core
profitability is very strong (currency and royalty have taken away c
450 bp in two years). From hereon, we expect operating leverage
and pricing power to help margins improve 80 bp in FY11-13E.
● We raise our revenue forecasts (2-3% for FY11-13E), but cut
margin assumptions (60-70 bp), leading to a 4-5% decline in
FY11-13E EPS. Our target price, as a result, drops to Rs1,514.
● Post the recent underperformance, the stock looks attractive at
13x FY12E EPS. Upgrade to OUTPERFORM.
Maruti 3Q FY11 results below estimates
Maruti (MRTI) reported 3Q11 EBITDA at Rs9 bn, 13% below
estimates, driven by both lower revenues (-3% versus estimate) and
margins (-100 bp versus estimate). PAT, as a result, missed our
forecast by 12%.
Most of the margin miss is explained by higher raw material costs
which were impacted by adverse currency movements. While 2Q11
was relatively unaffected, the impact of a sharp appreciation in yen (c
8%) came through with a lag. MRTI has kept its yen position
unhedged beyond Feb., expecting a reversal in currency.
Exports hit by lower realisations and poor mix
Led by continued weakness in Europe, export volumes dropped 20%
YoY in 3Q11, while revenue dropped 36%. Export realisations have
been hit both on account of: (1) a worsening mix – non-European
markets constituted 70% of exports in 3Q11 (30% in FY10, 60% in
2Q11) which have lower realisations, (2) adverse forex impact – lower
realisations both in Euro and USD (largely unhedged). We note that,
despite the impact on realisations, MRTI has been unable to take any
pricing action in export markets. The lack of control over export
profitability and channelling of much needed capacity to this business
remain a concern.
Domestic business continues to be robust
Maruti’s domestic volumes have grown 31% YTD, in line with the
industry. Concerns on market share loss due to increased competition
have remained largely unfounded. We see threat from some of the
competitors’ recent launches already receding. While we maintain
market share loss is inevitable, we take comfort from strength of
Maruti’s franchise on display so far. While there are concerns on rising
interest rates and availability of financing, there are no signs of
slowdown in the market as of now. We note that historically there has
been little correlation between car demand growth and interest rates.
Helped by efficiency-driven initiatives, the company expects to begin
FY12 with an increased capacity of 1.4 mn units p.a. (1.2 mn in
FY11). This, in addition to a capacity expansion of another 250,000 in
2H FY12E, places MRTI in a comfortable position for a 15-20%
volume growth next year (we forecast 14% growth in FY12E).
Upgrade to OUTPERFORM
We raise our domestic volume estimates (about 4% FY11-13E) but
cut our export realisations for FY11. We also reduce our margin
assumptions by 60-70 bp, leading to a 4-5% drop in our FY11-13E
EPS estimates. Our target price (based on 16x FY12E core EPS),
therefore, drops to Rs1,514.
We note that Maruti’s core franchise, in terms of domestic market
share and profitability are very strong. We remain optimistic on the
domestic business despite the influx of competition. Reported margins
have been impacted by externalities such as royalty (c150 bp increase
versus earlier, recurring) and currency (negative impact of c 300-
400 bp, volatile). The strength in core franchise makes us optimistic
on long-term profitable growth. While we remain concerned on
Maruti’s export strategy, we believe the current valuations sufficiently
factor in these concerns. The stock has underperformed the market by
12% in the past three months and currently trades at a 12% discount
to the broader index (close to historic average). At 13x FY12E EPS
and forecast earnings at 18% CAGR (FY11-13E), we find the stock
attractive. Upgrade to OUTPERFORM.
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