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Maruti Suzuki India
Worst is not over yet
Event
We transfer coverage of Maruti Suzuki to Amit Mishra. We believe slowing
volume growth, rising raw material costs and high competitive pressures will
limit earnings growth for MSIL. Our earnings estimate for FY12 is 4-8% lower
than consensus. We maintain our contrarian Underperform rating on MSIL
and our target price of Rs1,080 suggests 16% downside from current levels.
Impact
Growth rates to slow on macro-headwinds. On a high base of >25%
growth over the last two years, we expect passenger car sales to grow 20% in
FY12E. We believe rising credit costs, car price hikes and a rise in fuel prices
have increased car ownership costs by over 15% for consumers, who are
already facing high inflation. We expect these factors to intensify further in
2HCY11E. We expect MSIL to grow sales at 16%, slower than the industry.
Competition will limit pricing power: Competition in the small car segment
is increasing with the new launches from Toyota, Ford and Nissan. Maruti has
increased prices by ~2.5% since January, which we think is inadequate to
offset cost pressures. We believe further price hikes will impact growth in the
current scenario. We expect sales & marketing costs to rise as industry
growth slows and competition rises. We expect margins to fall 60bp in FY12.
Limited cost levers to offset RM inflation. We expect raw material costs
(steel, rubber and copper) to remain high over the next 12 months. As a
result, we are expecting a 120bp contraction in gross margins in FY12E. We
believe that the company’s efforts to reduce import content will bring down
RM costs, but only in the longer term. The upside risks to our margin
assumptions would come if the JPY depreciates sharply against INR.
Earnings and target price revision
Our EPS estimates are below consensus: by 4% for FY12 and 8% for FY13.
We believe consensus is underestimating the pressure on margins and thus
on profitability. We expect PAT to increase at a CAGR of 11%, driven by topline
growth of 17% (volume growth: 15% CAGR).
Price catalyst
12-month price target: Rs1,080.00 based on a DCF methodology.
Catalyst: Volume growth and rise in commodity costs.
Action and recommendation
Maruti currently trades at 13.4x FY12E earnings, in line with its historical
average. With the operating environment getting tougher and growth slowing,
we believe the current valuations are not justified. We value Maruti at Rs1,080
per share on a DCF basis; this implies a valuation of 12x FY12E earnings.
We recommend a switch from Maruti Suzuki to Mahindra & Mahindra (MM IN,
Rs723, Outperform, TP: Rs860), which is our preferred play in the sector in
India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki India
Worst is not over yet
Event
We transfer coverage of Maruti Suzuki to Amit Mishra. We believe slowing
volume growth, rising raw material costs and high competitive pressures will
limit earnings growth for MSIL. Our earnings estimate for FY12 is 4-8% lower
than consensus. We maintain our contrarian Underperform rating on MSIL
and our target price of Rs1,080 suggests 16% downside from current levels.
Impact
Growth rates to slow on macro-headwinds. On a high base of >25%
growth over the last two years, we expect passenger car sales to grow 20% in
FY12E. We believe rising credit costs, car price hikes and a rise in fuel prices
have increased car ownership costs by over 15% for consumers, who are
already facing high inflation. We expect these factors to intensify further in
2HCY11E. We expect MSIL to grow sales at 16%, slower than the industry.
Competition will limit pricing power: Competition in the small car segment
is increasing with the new launches from Toyota, Ford and Nissan. Maruti has
increased prices by ~2.5% since January, which we think is inadequate to
offset cost pressures. We believe further price hikes will impact growth in the
current scenario. We expect sales & marketing costs to rise as industry
growth slows and competition rises. We expect margins to fall 60bp in FY12.
Limited cost levers to offset RM inflation. We expect raw material costs
(steel, rubber and copper) to remain high over the next 12 months. As a
result, we are expecting a 120bp contraction in gross margins in FY12E. We
believe that the company’s efforts to reduce import content will bring down
RM costs, but only in the longer term. The upside risks to our margin
assumptions would come if the JPY depreciates sharply against INR.
Earnings and target price revision
Our EPS estimates are below consensus: by 4% for FY12 and 8% for FY13.
We believe consensus is underestimating the pressure on margins and thus
on profitability. We expect PAT to increase at a CAGR of 11%, driven by topline
growth of 17% (volume growth: 15% CAGR).
Price catalyst
12-month price target: Rs1,080.00 based on a DCF methodology.
Catalyst: Volume growth and rise in commodity costs.
Action and recommendation
Maruti currently trades at 13.4x FY12E earnings, in line with its historical
average. With the operating environment getting tougher and growth slowing,
we believe the current valuations are not justified. We value Maruti at Rs1,080
per share on a DCF basis; this implies a valuation of 12x FY12E earnings.
We recommend a switch from Maruti Suzuki to Mahindra & Mahindra (MM IN,
Rs723, Outperform, TP: Rs860), which is our preferred play in the sector in
India.
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