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Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
RoE is a key driver of valuation: significant upgrade cycle unlikely
What's changed
Maruti Suzuki has been the worst performing Indian auto stock under our
coverage since January 2010, underperforming the BSE Auto index by
22% during this period. In our view, a key driver of this underperformance
was a decline in margins during this period (5.2ppt), in spite of strong
demand growth and a buoyant economy. A key question we have from
investors over the last few weeks is whether the company’s margins and
valuations have bottomed. Historical analysis of Maruti Suzuki’s valuation
on P/B and RoE trends offers potentially interesting insights in this regard.
Implications
1) Analysis of valuation (on P/B) - Our regression analysis for the period
FY2004-2010 suggests that RoE is a key driver of valuation, and changes in
RoE account for >80% of variation in the stock price. We believe this is in
contrast to general investor (as well as our own) reliance on earnings
multiple-based approaches to valuation.
2) Analysis of returns (RoE) - Decomposing RoE into two key operational
drivers of returns suggests limited upside to FY12E-13E RoE expectations:
a) FY2012E asset turnover ratio appears to be at an eight-year peak;
b) There appear to be limited upside risks to our FY12-13E margins on
comparing with average margins achieved during 2004-2010, adjusting for
the permanent 2ppt increase in royalties, and competitive risks.
3) Analysis of stock price – Current valuation appears to price in FY12E
RoE of 15-17% Vs GSE 14.8%, FY2004-2010 average of 19%, Bloomberg
consensus of 17.5% and global peer group average of 15%.
Valuation
The stock is trading at FY12E P/E of 16.2X vs its Indian peers trading at
13.2X and its global peers at 11.9X. Our Neutral rating and 12-month
FY2012E P/E-based TP of Rs1,173 remain unchanged.
Key risks
Higher-/lower-than-expected demand or commodity costs.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
RoE is a key driver of valuation: significant upgrade cycle unlikely
What's changed
Maruti Suzuki has been the worst performing Indian auto stock under our
coverage since January 2010, underperforming the BSE Auto index by
22% during this period. In our view, a key driver of this underperformance
was a decline in margins during this period (5.2ppt), in spite of strong
demand growth and a buoyant economy. A key question we have from
investors over the last few weeks is whether the company’s margins and
valuations have bottomed. Historical analysis of Maruti Suzuki’s valuation
on P/B and RoE trends offers potentially interesting insights in this regard.
Implications
1) Analysis of valuation (on P/B) - Our regression analysis for the period
FY2004-2010 suggests that RoE is a key driver of valuation, and changes in
RoE account for >80% of variation in the stock price. We believe this is in
contrast to general investor (as well as our own) reliance on earnings
multiple-based approaches to valuation.
2) Analysis of returns (RoE) - Decomposing RoE into two key operational
drivers of returns suggests limited upside to FY12E-13E RoE expectations:
a) FY2012E asset turnover ratio appears to be at an eight-year peak;
b) There appear to be limited upside risks to our FY12-13E margins on
comparing with average margins achieved during 2004-2010, adjusting for
the permanent 2ppt increase in royalties, and competitive risks.
3) Analysis of stock price – Current valuation appears to price in FY12E
RoE of 15-17% Vs GSE 14.8%, FY2004-2010 average of 19%, Bloomberg
consensus of 17.5% and global peer group average of 15%.
Valuation
The stock is trading at FY12E P/E of 16.2X vs its Indian peers trading at
13.2X and its global peers at 11.9X. Our Neutral rating and 12-month
FY2012E P/E-based TP of Rs1,173 remain unchanged.
Key risks
Higher-/lower-than-expected demand or commodity costs.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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