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UBS Investment Research
Maruti Suzuki India
Margins held hostage to yen
Yen spike raises fears of margin pressure
The sharp spike in the Yen vs other currencies, has clearly raised concerns of
margin pressure for Maruti given its large import from Japan. Maruti imports raw
material/components worth 22% of sales from Japan as well as pays royalty of
close to ~5.3% of sales which is again yen denominated. The co. remains unhedged
on the yen. Consequently, sharp moves in the yen can significantly dent earnings.
Current JPYINR spot could lead to a 8.5% downgrade to our FY12 EPS
The current JPYINR is at 0.5718 versus our FY12 assumption of 0.54 for FY12. At
the current spot rate our estimates for FY12 would decline 8.5% (Please refer to
sensitivity table on next page). However, we will wait for the currency market
conditions to slightly stabilize before making any changes to our estimates.
Increased localization and price increases could partially mitigate impact
We believe co. can take some price increases to partially mitigate impact of yen
appreciation as well as continue to increase localization of indirect imports by
vendors to reduce dependence on yen. Co. is targeting to reduce its indirect yen
imports by 5% of sales.
Valuation: Maintain Buy, PT Rs 1,650
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.5%.
Maruti Suzuki India
Maruti Udyog Limited is the largest passenger car manufacturer in India with a
market share of over 50%. The company was formed in 1983 and commenced
operations in 1984, as a joint venture between the Government of India (GOI)
and Suzuki Motor Corporation. In 2002, GOI ceded majority control to Suzuki
by not subscribing to a rights issue. GOI subsequently sold 27.5% of its stake to
investors in an IPO. Suzuki owns 54.6% of Maruti. Suzuki selected Maruti to be
its small car manufacturing hub for the European market and also as an R&D
centre.
Statement of Risk
Higher raw material costs and slowdown in demand remain the key risks to our
estimates for Maruti. Increasing competitive pressure due to entry of newer
players in its core segment could further impact margins negatively. Significant
portion of exports are to EU and imports from Japan, hence euro depreciation
and yen appreciation will negatively impact company's margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Maruti Suzuki India
Margins held hostage to yen
Yen spike raises fears of margin pressure
The sharp spike in the Yen vs other currencies, has clearly raised concerns of
margin pressure for Maruti given its large import from Japan. Maruti imports raw
material/components worth 22% of sales from Japan as well as pays royalty of
close to ~5.3% of sales which is again yen denominated. The co. remains unhedged
on the yen. Consequently, sharp moves in the yen can significantly dent earnings.
Current JPYINR spot could lead to a 8.5% downgrade to our FY12 EPS
The current JPYINR is at 0.5718 versus our FY12 assumption of 0.54 for FY12. At
the current spot rate our estimates for FY12 would decline 8.5% (Please refer to
sensitivity table on next page). However, we will wait for the currency market
conditions to slightly stabilize before making any changes to our estimates.
Increased localization and price increases could partially mitigate impact
We believe co. can take some price increases to partially mitigate impact of yen
appreciation as well as continue to increase localization of indirect imports by
vendors to reduce dependence on yen. Co. is targeting to reduce its indirect yen
imports by 5% of sales.
Valuation: Maintain Buy, PT Rs 1,650
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.5%.
Maruti Suzuki India
Maruti Udyog Limited is the largest passenger car manufacturer in India with a
market share of over 50%. The company was formed in 1983 and commenced
operations in 1984, as a joint venture between the Government of India (GOI)
and Suzuki Motor Corporation. In 2002, GOI ceded majority control to Suzuki
by not subscribing to a rights issue. GOI subsequently sold 27.5% of its stake to
investors in an IPO. Suzuki owns 54.6% of Maruti. Suzuki selected Maruti to be
its small car manufacturing hub for the European market and also as an R&D
centre.
Statement of Risk
Higher raw material costs and slowdown in demand remain the key risks to our
estimates for Maruti. Increasing competitive pressure due to entry of newer
players in its core segment could further impact margins negatively. Significant
portion of exports are to EU and imports from Japan, hence euro depreciation
and yen appreciation will negatively impact company's margins.
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