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Maruti Suzuki's 4QFY11 performance was above estimates with EBITDA margins of 10% due to higher realizations and
a change in accounting policy. Adjusted for accounting policy changes, operating performance was in line with our
estimates. Key highlights include:
Volumes grew 19.5% YoY (3.8% QoQ) to 343,340 units. Realizations rose by 2.4% QoQ (~0.3% YoY) to Rs287,288/
unit, driven by a favorable market mix and forex movement (for exports). Net revenue grew 20% YoY to Rs99.1b.
EBITDA margins improved by 50bp QoQ (down ~320bp YoY) to 10%, due to lower raw material costs (due to a
change in accounting policy with respect to tools given to a vendor). Besides, lower tax provisioning (due to higher
R&D costs) boosted PAT to Rs6.6b.
The management indicated signs of a slowdown in retail volumes due to higher interest rates and fuel prices,
resulting in a decline in footfalls and conversions. The management guided for 10-15% volume growth in FY12,
though it would have capacity in place for volume growth of 15-20%.
It expects raw material cost inflation as it negotiates for 1HFY12. This, along with higher R&D spends (from 1.1% in
FY11 to 1.3-1.4% in FY12) will put pressure on margins. However, hedged forex exposure (~40% of FY12 forex
exposure), higher operating leverage and lower tax due to higher R&D would dilute the impact of the cost inflation.
Valuation and view: We are downgrading FY12 S/A EPS by 1.6% to Rs91.4 and FY13 by ~1.2% to Rs110 to factor in
higher raw material costs, R&D expenses, partial forex hedging and a lower tax rate. Our consolidated EPS for FY12 is
downgraded by 5.2% to Rs95.5 and for FY13 by 4.8% to Rs110 to factor in no contribution from the insurance subsidiaries.
The stock trades at 13.9x FY12E and 11.5x FY13E consolidated EPS and 9.9x FY12E and 8.2x FY13E CEPS. Maintain
Buy with a target price of Rs1,625 (~10x FY13E CEPS).
Robust volumes, higher realizations boost revenue
Net revenue grew 6.3% QoQ (~19.8% YoY) to Rs100.9b (against our estimate of Rs98.9b),
driven by 3.8% QoQ (~19.5% YoY) improvement in volumes and 2.4% QoQ (~0.3%
YoY) improvement in realizations. In 4QFY11, Maruti lost market share by 320bp QoQ
(up ~180bp YoY) to 49.5% of the domestic passenger vehicle (PV) market (excluding the
Nano).
Overall volume growth was driven by domestic volumes, which grew 4.2% QoQ (up
27.3% YoY) and 3.8% QoQ (down 26.4% YoY) export growth. European exports were
under pressure but they were largely offset by strong in non-EU exports, resulting in an
increase in the non-EU share of exports to ~60% of total exports.
Improvement in realizations was driven by a price hike of 1-1.5% in January 2011, a better
product mix (due to the launch of the SX4 diesel version and Kizashi), as well as higher
export realizations (due to favorable movement of the euro) and stable discounts of Rs10,500/
unit (v/s Rs10,700/unit in 3QFY11 and Rs9,300/unit in 4QFY10).
Higher realizations, change in accounting policy boost profitability
EBITDA margins improved by 50bp QoQ (down ~320bp YoY) to 10% (against our estimate
of 9.8%) due to higher realizations and lower raw material costs (due to a change in
accounting policy with respect to tools given to a vendor).
Raw material costs declined 50bp QoQ (up ~180bp YoY) due to change in accounting
policy on tools given to vendor. Tools given to vendors were earlier amortized by vendors
and added to raw material costs. However, Maruti changed its accounting (in line with
IFRS) to depreciate in its own book, resulting in lower raw material costs but higher
depreciation.
Staff costs fell 90bp QoQ (~30bp YoY) due to write-back of excess provisioning of employee
benefits. Other expenses were higher by 50bp due to higher R&D and repairs.
EBITDA grew by 12% QoQ (de-growth of ~9% YoY) to Rs10b (against our estimate of
Rs9.67b). However, higher depreciation (due to a change in accounting policy) restricted
PBT growth to 4.3% QoQ (down ~13.4% YoY) to Rs8.26b (against our estimate of
Rs8.5b). Lower tax provisioning due to higher R&D spends boosted reported PAT to
Rs6.6b (against our estimate of Rs6.08b)
Cancellation of insurance agency license impacts consolidated performance
The FY11 consolidated operating performance was impacted by the cancellation of the
company's insurance agency license by the IRDA, resulting in a decline in its subsidiary
contribution to consolidated PAT of Rs937m (v/s Rs1.27b in FY10). In July 2010, the
IRDA cancelled Maruti's agency license for allegedly inflating claims and profiteering at
the expense of insurance companies. In FY10 it would have sold at least 2.5m policies, as
it had agencies for six general insurance firms. In FY10 the insurance subsidiaries contributed
~Rs600m to consolidated PAT (~2.3% of consolidated PAT).
The company is restructuring its insurance business model and considering options including
setting up of an insurance company. However, there is no clarity on the time frame and
hence we are not including contributions from the insurance subsidiaries in FY12 and
beyond.
Other result highlights and a call with the management
The management indicated that it did not envisage an impact on its production, unlike
its peers, to due to problems in Japan.
The company increased prices by ~1% from April 2011 in the domestic market and
reduced its discount levels in April compared with March 2011.
The company hedged ~40% of its FY12 forex exposure.
In 4QFY11 financing was stable at 67% (percentage of volumes) but down from 70%
in 2QFY11 and 4QFY10. This is a reflection of the company's increasing share of the
rural markets to ~20%.
In exports, Maruti is focusing on non-EU markets to offset a decline in EU exports.
The share of non-EU countries in exports was 60% in 4QFY11.
The management guided for capex of Rs40b in FY12 (against Rs22b in FY11), which
is higher than our estimate of Rs30b due to the bringing forward of capacity addition
in Manesar.
Downgrading EPS due to lack of clarity on the insurance business
We are downgrading our consolidated EPS for FY12 by 5.2% to Rs95.5 and for FY13
by 4.8% to Rs115.5 to factor in no contribution from the insurance subsidiaries.
Our standalone EPS has been marginally downgraded by 1.6% to Rs91.4 in FY12 and
by ~1.2% to Rs110 in FY13 to factor in higher raw material costs, R&D expenses,
partial forex hedging and a lower tax rate.
We estimate FY12 volume growth of 14% and 15% growth in FY13, EBITDA margin
decline of 30bp in FY12 (due to higher raw material and R&D expenses in FY12) to
9.8% and 50bp improvement in EBITDA margins in FY13 to 10.3%.
Valuation and view
Maruti has underperformed the Sensex by 9% over the past six months as its margins
were under pressure due to the raw material cost push and adverse forex movement. We
see limited downside to its margins from the current level, barring significant adverse
forex movement.
With easing of capacity constraints, we expect Maruti to recover and defend its market
share despite competitive pressure. We estimate gradual improvement in EBITDA margins
from 9.8% in FY12 to 10.3% in FY13, driven by higher operating leverage, reduction in
imports and stability in forex.
The stock trades at 13.9x FY12E and 11.5x FY13E consolidated EPS and 9.9x FY12E
and 8.2x FY13E CEPS. Maintain Buy with price target of Rs1,625 (~10x FY13E CEPS).
Company description
Maruti Suzuki is the largest passenger vehicle maker in
India and dominates the car segment with ~50% market
share (excluding the Nano). It is also emerging as the global
export hub of small cars for Suzuki, with the globally strategic
model, A-Star, being exclusively produced in India.
Key investment arguments
Strong volume momentum to continue in FY11, driven
by an estimated 30% growth in domestic volumes.
Volume growth in the domestic market driven by a focus
on tier-II cities and the rural market.
Improving product mix with increasing share of the A2
and A3 segment, driven by new products.
Key investments risks
Increasing competition in the key A2 segment.
Adverse forex movement may impact margins
negatively.
Higher royalty and strengthening of commodity prices
could impact margins.
Recent developments
Increased selling prices of cars by ~1% from April
across all models.
Valuation and view
The stock trades at 13.9x FY12E & 11.5x FY13E consol
EPS and 9.9x FY12E & 8.2x FY13E CEPS.
Maintain Buy with a target price of Rs1,625 (~10x
FY13E CEPS).
Sector view
The passenger vehicle segment is expected to continue
its growth momentum.
With low car penetration in India, the upside for growth
is tremendous.
However, increasing competition poses a long-term
threat.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki's 4QFY11 performance was above estimates with EBITDA margins of 10% due to higher realizations and
a change in accounting policy. Adjusted for accounting policy changes, operating performance was in line with our
estimates. Key highlights include:
Volumes grew 19.5% YoY (3.8% QoQ) to 343,340 units. Realizations rose by 2.4% QoQ (~0.3% YoY) to Rs287,288/
unit, driven by a favorable market mix and forex movement (for exports). Net revenue grew 20% YoY to Rs99.1b.
EBITDA margins improved by 50bp QoQ (down ~320bp YoY) to 10%, due to lower raw material costs (due to a
change in accounting policy with respect to tools given to a vendor). Besides, lower tax provisioning (due to higher
R&D costs) boosted PAT to Rs6.6b.
The management indicated signs of a slowdown in retail volumes due to higher interest rates and fuel prices,
resulting in a decline in footfalls and conversions. The management guided for 10-15% volume growth in FY12,
though it would have capacity in place for volume growth of 15-20%.
It expects raw material cost inflation as it negotiates for 1HFY12. This, along with higher R&D spends (from 1.1% in
FY11 to 1.3-1.4% in FY12) will put pressure on margins. However, hedged forex exposure (~40% of FY12 forex
exposure), higher operating leverage and lower tax due to higher R&D would dilute the impact of the cost inflation.
Valuation and view: We are downgrading FY12 S/A EPS by 1.6% to Rs91.4 and FY13 by ~1.2% to Rs110 to factor in
higher raw material costs, R&D expenses, partial forex hedging and a lower tax rate. Our consolidated EPS for FY12 is
downgraded by 5.2% to Rs95.5 and for FY13 by 4.8% to Rs110 to factor in no contribution from the insurance subsidiaries.
The stock trades at 13.9x FY12E and 11.5x FY13E consolidated EPS and 9.9x FY12E and 8.2x FY13E CEPS. Maintain
Buy with a target price of Rs1,625 (~10x FY13E CEPS).
Robust volumes, higher realizations boost revenue
Net revenue grew 6.3% QoQ (~19.8% YoY) to Rs100.9b (against our estimate of Rs98.9b),
driven by 3.8% QoQ (~19.5% YoY) improvement in volumes and 2.4% QoQ (~0.3%
YoY) improvement in realizations. In 4QFY11, Maruti lost market share by 320bp QoQ
(up ~180bp YoY) to 49.5% of the domestic passenger vehicle (PV) market (excluding the
Nano).
Overall volume growth was driven by domestic volumes, which grew 4.2% QoQ (up
27.3% YoY) and 3.8% QoQ (down 26.4% YoY) export growth. European exports were
under pressure but they were largely offset by strong in non-EU exports, resulting in an
increase in the non-EU share of exports to ~60% of total exports.
Improvement in realizations was driven by a price hike of 1-1.5% in January 2011, a better
product mix (due to the launch of the SX4 diesel version and Kizashi), as well as higher
export realizations (due to favorable movement of the euro) and stable discounts of Rs10,500/
unit (v/s Rs10,700/unit in 3QFY11 and Rs9,300/unit in 4QFY10).
Higher realizations, change in accounting policy boost profitability
EBITDA margins improved by 50bp QoQ (down ~320bp YoY) to 10% (against our estimate
of 9.8%) due to higher realizations and lower raw material costs (due to a change in
accounting policy with respect to tools given to a vendor).
Raw material costs declined 50bp QoQ (up ~180bp YoY) due to change in accounting
policy on tools given to vendor. Tools given to vendors were earlier amortized by vendors
and added to raw material costs. However, Maruti changed its accounting (in line with
IFRS) to depreciate in its own book, resulting in lower raw material costs but higher
depreciation.
Staff costs fell 90bp QoQ (~30bp YoY) due to write-back of excess provisioning of employee
benefits. Other expenses were higher by 50bp due to higher R&D and repairs.
EBITDA grew by 12% QoQ (de-growth of ~9% YoY) to Rs10b (against our estimate of
Rs9.67b). However, higher depreciation (due to a change in accounting policy) restricted
PBT growth to 4.3% QoQ (down ~13.4% YoY) to Rs8.26b (against our estimate of
Rs8.5b). Lower tax provisioning due to higher R&D spends boosted reported PAT to
Rs6.6b (against our estimate of Rs6.08b)
Cancellation of insurance agency license impacts consolidated performance
The FY11 consolidated operating performance was impacted by the cancellation of the
company's insurance agency license by the IRDA, resulting in a decline in its subsidiary
contribution to consolidated PAT of Rs937m (v/s Rs1.27b in FY10). In July 2010, the
IRDA cancelled Maruti's agency license for allegedly inflating claims and profiteering at
the expense of insurance companies. In FY10 it would have sold at least 2.5m policies, as
it had agencies for six general insurance firms. In FY10 the insurance subsidiaries contributed
~Rs600m to consolidated PAT (~2.3% of consolidated PAT).
The company is restructuring its insurance business model and considering options including
setting up of an insurance company. However, there is no clarity on the time frame and
hence we are not including contributions from the insurance subsidiaries in FY12 and
beyond.
Other result highlights and a call with the management
The management indicated that it did not envisage an impact on its production, unlike
its peers, to due to problems in Japan.
The company increased prices by ~1% from April 2011 in the domestic market and
reduced its discount levels in April compared with March 2011.
The company hedged ~40% of its FY12 forex exposure.
In 4QFY11 financing was stable at 67% (percentage of volumes) but down from 70%
in 2QFY11 and 4QFY10. This is a reflection of the company's increasing share of the
rural markets to ~20%.
In exports, Maruti is focusing on non-EU markets to offset a decline in EU exports.
The share of non-EU countries in exports was 60% in 4QFY11.
The management guided for capex of Rs40b in FY12 (against Rs22b in FY11), which
is higher than our estimate of Rs30b due to the bringing forward of capacity addition
in Manesar.
Downgrading EPS due to lack of clarity on the insurance business
We are downgrading our consolidated EPS for FY12 by 5.2% to Rs95.5 and for FY13
by 4.8% to Rs115.5 to factor in no contribution from the insurance subsidiaries.
Our standalone EPS has been marginally downgraded by 1.6% to Rs91.4 in FY12 and
by ~1.2% to Rs110 in FY13 to factor in higher raw material costs, R&D expenses,
partial forex hedging and a lower tax rate.
We estimate FY12 volume growth of 14% and 15% growth in FY13, EBITDA margin
decline of 30bp in FY12 (due to higher raw material and R&D expenses in FY12) to
9.8% and 50bp improvement in EBITDA margins in FY13 to 10.3%.
Valuation and view
Maruti has underperformed the Sensex by 9% over the past six months as its margins
were under pressure due to the raw material cost push and adverse forex movement. We
see limited downside to its margins from the current level, barring significant adverse
forex movement.
With easing of capacity constraints, we expect Maruti to recover and defend its market
share despite competitive pressure. We estimate gradual improvement in EBITDA margins
from 9.8% in FY12 to 10.3% in FY13, driven by higher operating leverage, reduction in
imports and stability in forex.
The stock trades at 13.9x FY12E and 11.5x FY13E consolidated EPS and 9.9x FY12E
and 8.2x FY13E CEPS. Maintain Buy with price target of Rs1,625 (~10x FY13E CEPS).
Company description
Maruti Suzuki is the largest passenger vehicle maker in
India and dominates the car segment with ~50% market
share (excluding the Nano). It is also emerging as the global
export hub of small cars for Suzuki, with the globally strategic
model, A-Star, being exclusively produced in India.
Key investment arguments
Strong volume momentum to continue in FY11, driven
by an estimated 30% growth in domestic volumes.
Volume growth in the domestic market driven by a focus
on tier-II cities and the rural market.
Improving product mix with increasing share of the A2
and A3 segment, driven by new products.
Key investments risks
Increasing competition in the key A2 segment.
Adverse forex movement may impact margins
negatively.
Higher royalty and strengthening of commodity prices
could impact margins.
Recent developments
Increased selling prices of cars by ~1% from April
across all models.
Valuation and view
The stock trades at 13.9x FY12E & 11.5x FY13E consol
EPS and 9.9x FY12E & 8.2x FY13E CEPS.
Maintain Buy with a target price of Rs1,625 (~10x
FY13E CEPS).
Sector view
The passenger vehicle segment is expected to continue
its growth momentum.
With low car penetration in India, the upside for growth
is tremendous.
However, increasing competition poses a long-term
threat.
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