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Maruti Suzuki (MSIL)
Automobiles
In-line quarter, lower tax rate leads to earnings surprise. Maruti Suzuki’s 4QFY11
profit of Rs6,600 mn (flat yoy, +17% qoq) was 10% above our estimates driven by
lower tax rate (20.2% versus our estimate of 29%). EBITDA margins improved by 50
bps sequentially driven by lower raw material expenses (due to lower tooling costs) and
staff costs. We increase our target price to Rs1,730 (from Rs 1,460) as we roll over to
FY2013E. Our target price is based on 15X FY2013E consolidated EPS. Maintain BUY.
Lower tax rate leads to earnings surprise
4QFY11 reported profit of Rs6,600 mn was 10% ahead or our estimates driven by lower tax rate
(20% versus our estimate of 29%). Tax rate was lower than estimates due to higher R&D expenses
during the quarter. Management indicated that tax rate is likely to remain at ~26% levels as the
company will continue to invest in R&D.
Net revenues were in line with our estimates while EBITDA was ahead by 5%. EBITDA margins
increased by 50 bps qoq driven by lower raw material expenses and staff costs. Raw material
expenses to net sales decreased by 50 bps qoq due to decline in tooling expenses of vendors which
were earlier part of component costs. Maruti has purchased the tooling of vendors and hence
tooling capex has been added in the gross block of Maruti Suzuki while component cost has been
reduced as it was earlier part of component costing. Staff costs increased due to a Rs200 mn writeback
related to gratuity.
Other expenses to net sales increased by 100 bps qoq driven by (1) a Rs500 mn increase related to
rise in R&D and repair expenses, (2) an increase in selling and distribution expenses from 2.2% of
sales in 3QFY11 to 2.9% of sales in 4QFY11 due to launch expenses related to SX4 diesel, Kizashi
and (3) an increase in promotional expenses during the ICC Cricket World Cup.
Maintain BUY, raise target price to Rs1,730
We increase our target price to Rs1,730 as we roll over to FY2013E. We base our target price at
15X PE on our consolidated FY2013E EPS of Rs115. We have also increased our earnings estimates
by 3-5% over FY2012-13E as we factor in depreciation of Yen versus Rupee. We believe Maruti’s
margins have bottomed out and the stock is trading at attractive valuations of 11.5X PE on our
FY2013E EPS estimate which provides a good entry opportunity, in our view. We factor in volume
growth of 14-15% over the next two years which we believe is achievable despite macro
headwinds. We maintain our BUY rating. The stock offers 30% upside from current levels making
it our top pick in the sector (versus M&M earlier which has outperformed significantly over the last
month). Downside risks – 1) Rising fuel prices and interest costs, 2) Further rise in commodity prices
In-line quarter buoyed by lower tax rate
4QFY11 reported profit of Rs6,600 mn was 10% ahead or our estimates driven by lower tax
rate (20% versus our estimate of 29%). Tax rate was lower than estimates due to higher
R&D expenses during the quarter. Management indicated that tax rate is likely to remain at
~26% levels as the company will continue to invest in R&D.
Net revenues were in line with our estimates while EBITDA was ahead by 5%. EBITDA
margins increased by 50 bps qoq driven by lower raw material expenses and staff costs. Raw
material expenses to net sales decreased by 50 bps qoq due to a decline in tooling expenses
of vendors which were earlier part of component costs. Maruti has purchased the tooling of
vendors and hence tooling capex has been added in the gross block of Maruti Suzuki while
component cost has been reduced as it was earlier part of component costing. This also
resulted in a Rs597 mn sequential increase in depreciation expenses. Key point to note here
is that the company booked the entire FY2011 impact due to tooling cost in 4QFY11, hence
EBITDA margins did improve slightly on a qoq basis.
Staff costs also declined sharply driven by a Rs200 mn write-back related to gratuity and
leave encashment expenses. 3QFY11 also included a one-time impact related to increase in
salaries of employees done with a retrospective effect.
Gross average selling prices increased by 3% qoq driven by improvement in product mix
(higher sales of Swift Dezire, Kizashi and SX4 diesel in the mix). Export ASPs were up 4.4%
qoq which is encouraging, in our view. Domestic ASPs also improved by 3% qoq.
Other expenses to net sales increased by 100 bps qoq driven by (1) a Rs500 mn increase
related to rise in R&D and repair expenses, (2) an increase in selling and distribution
expenses from 2.2% of sales in 3QFY11 to 2.9% of sales in 4QFY11 due to launch expenses
related to SX4 diesel, Kizashi and (3) an increase in promotional expenses during the ICC
Cricket World Cup.
We also attended the conference call organized by management. Key takeaways are
as follows:
1) Export ASPs improved during the quarter. Export ASPs increased by 4.4% qoq
despite volumes being flat qoq due to an improvement in product mix. Company
did not take any price increase in export markets. Non-European volumes have
improved significantly and now form 55% of export volumes and Europe forms
45% of export volumes. For FY2011, export ASPs have declined by 16% qoq due
to a sharp decline in European volumes.
2) Discounts have been maintained at FY2010 levels. Contrary to the Street’s
expectations that discounts have increased in FY2011, management indicated that
discounts have been maintained at FY2010 levels and average around
Rs10,500/vehicle. Our channel checks suggest discounts have reduced further in
April as compared to March 2011.
3) The company had taken a 1% price increase in domestic market in January 2011
and has taken another 1.5% price increase in April 2011. The company indicated
that they are likely to give a 10-15% increase in steel costs to vendors in April 2011.
The company is also likely to see an increase in tyre prices and wiring harnesses in
1QFY12E.
4) The company has hedged 40% of its direct Yen exposure (~12% of net sales) at
~84 JPY/USD rate for FY2012E versus FY2011 average of 87, which is likely to
benefit Maruti’s margins. Maruti’s Yen exposure is ~23% of net sales and half of
the royalty expense is also paid in Yen. Hence, total JPY exposure is around 25.5%
of net sales. Therefore, a 1% depreciation in JPY/INR will benefit Maruti’s margins
by 25 bps. Yen has depreciated by 3% in April from 4QFY11 average levels.
5) The company also indicated that they plan to reduce imported Yen content by
1.5% of sales every year. We believe the process of localization of components will
increase after the tsunami in Japan which has made automotive companies around
the world realize the need for developing local sourcing.
6) We believe competitive intensity will also be likely muted for Maruti in 1HFY12E as
both Toyota and Honda have announced sharp cuts in production in India due to
component shortage from May onwards. Both companies have delayed their
launch of Etios hatchback and Honda Brio. Maruti has indicated they are not facing
any supply issues as of now.
7) The company will continue to invest in R&D and indicated R&D expense as a % of
sales will increase from current 1.1% of sales to 1.4% of sales in FY2012E of which
0.5% of sales will be recurring R&D.
8) Capex has been increased to Rs80 bn over FY2011-2013E versus Rs67 bn earlier.
The company has spent Rs22 bn in FY2011 and will spend another Rs40 bn in
FY2012E.
9) The company’s consolidated EPS for FY2011 was Rs82.4 (declined by 9% yoy).
Subsidiary EPS declined by 26% yoy due to restructuring of the general insurance
subsidiary. The company indicated that the general insurance subsidiary made a
profit of Rs600 mn in FY2010 and made no profits in FY2011 which led to the
sharp fall in profits of subsidiaries. The company indicated profits for this subsidiary
will reach earlier levels in FY2012E and hence we factor in Rs5/share of EPS for
subsidiaries in FY2012E.
Revise our earnings by +3-5% in FY2012-13E to factor in improvement in EBITDA
margins
We increase our earnings estimate by 3-5% over FY2012-13E as we increase our EBITDA
margin estimates by 40-70 bps factoring in depreciation in Yen. We have not factored in
benefits which may accrue from increase in localization as of now which could provide
upside to our earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki (MSIL)
Automobiles
In-line quarter, lower tax rate leads to earnings surprise. Maruti Suzuki’s 4QFY11
profit of Rs6,600 mn (flat yoy, +17% qoq) was 10% above our estimates driven by
lower tax rate (20.2% versus our estimate of 29%). EBITDA margins improved by 50
bps sequentially driven by lower raw material expenses (due to lower tooling costs) and
staff costs. We increase our target price to Rs1,730 (from Rs 1,460) as we roll over to
FY2013E. Our target price is based on 15X FY2013E consolidated EPS. Maintain BUY.
Lower tax rate leads to earnings surprise
4QFY11 reported profit of Rs6,600 mn was 10% ahead or our estimates driven by lower tax rate
(20% versus our estimate of 29%). Tax rate was lower than estimates due to higher R&D expenses
during the quarter. Management indicated that tax rate is likely to remain at ~26% levels as the
company will continue to invest in R&D.
Net revenues were in line with our estimates while EBITDA was ahead by 5%. EBITDA margins
increased by 50 bps qoq driven by lower raw material expenses and staff costs. Raw material
expenses to net sales decreased by 50 bps qoq due to decline in tooling expenses of vendors which
were earlier part of component costs. Maruti has purchased the tooling of vendors and hence
tooling capex has been added in the gross block of Maruti Suzuki while component cost has been
reduced as it was earlier part of component costing. Staff costs increased due to a Rs200 mn writeback
related to gratuity.
Other expenses to net sales increased by 100 bps qoq driven by (1) a Rs500 mn increase related to
rise in R&D and repair expenses, (2) an increase in selling and distribution expenses from 2.2% of
sales in 3QFY11 to 2.9% of sales in 4QFY11 due to launch expenses related to SX4 diesel, Kizashi
and (3) an increase in promotional expenses during the ICC Cricket World Cup.
Maintain BUY, raise target price to Rs1,730
We increase our target price to Rs1,730 as we roll over to FY2013E. We base our target price at
15X PE on our consolidated FY2013E EPS of Rs115. We have also increased our earnings estimates
by 3-5% over FY2012-13E as we factor in depreciation of Yen versus Rupee. We believe Maruti’s
margins have bottomed out and the stock is trading at attractive valuations of 11.5X PE on our
FY2013E EPS estimate which provides a good entry opportunity, in our view. We factor in volume
growth of 14-15% over the next two years which we believe is achievable despite macro
headwinds. We maintain our BUY rating. The stock offers 30% upside from current levels making
it our top pick in the sector (versus M&M earlier which has outperformed significantly over the last
month). Downside risks – 1) Rising fuel prices and interest costs, 2) Further rise in commodity prices
In-line quarter buoyed by lower tax rate
4QFY11 reported profit of Rs6,600 mn was 10% ahead or our estimates driven by lower tax
rate (20% versus our estimate of 29%). Tax rate was lower than estimates due to higher
R&D expenses during the quarter. Management indicated that tax rate is likely to remain at
~26% levels as the company will continue to invest in R&D.
Net revenues were in line with our estimates while EBITDA was ahead by 5%. EBITDA
margins increased by 50 bps qoq driven by lower raw material expenses and staff costs. Raw
material expenses to net sales decreased by 50 bps qoq due to a decline in tooling expenses
of vendors which were earlier part of component costs. Maruti has purchased the tooling of
vendors and hence tooling capex has been added in the gross block of Maruti Suzuki while
component cost has been reduced as it was earlier part of component costing. This also
resulted in a Rs597 mn sequential increase in depreciation expenses. Key point to note here
is that the company booked the entire FY2011 impact due to tooling cost in 4QFY11, hence
EBITDA margins did improve slightly on a qoq basis.
Staff costs also declined sharply driven by a Rs200 mn write-back related to gratuity and
leave encashment expenses. 3QFY11 also included a one-time impact related to increase in
salaries of employees done with a retrospective effect.
Gross average selling prices increased by 3% qoq driven by improvement in product mix
(higher sales of Swift Dezire, Kizashi and SX4 diesel in the mix). Export ASPs were up 4.4%
qoq which is encouraging, in our view. Domestic ASPs also improved by 3% qoq.
Other expenses to net sales increased by 100 bps qoq driven by (1) a Rs500 mn increase
related to rise in R&D and repair expenses, (2) an increase in selling and distribution
expenses from 2.2% of sales in 3QFY11 to 2.9% of sales in 4QFY11 due to launch expenses
related to SX4 diesel, Kizashi and (3) an increase in promotional expenses during the ICC
Cricket World Cup.
We also attended the conference call organized by management. Key takeaways are
as follows:
1) Export ASPs improved during the quarter. Export ASPs increased by 4.4% qoq
despite volumes being flat qoq due to an improvement in product mix. Company
did not take any price increase in export markets. Non-European volumes have
improved significantly and now form 55% of export volumes and Europe forms
45% of export volumes. For FY2011, export ASPs have declined by 16% qoq due
to a sharp decline in European volumes.
2) Discounts have been maintained at FY2010 levels. Contrary to the Street’s
expectations that discounts have increased in FY2011, management indicated that
discounts have been maintained at FY2010 levels and average around
Rs10,500/vehicle. Our channel checks suggest discounts have reduced further in
April as compared to March 2011.
3) The company had taken a 1% price increase in domestic market in January 2011
and has taken another 1.5% price increase in April 2011. The company indicated
that they are likely to give a 10-15% increase in steel costs to vendors in April 2011.
The company is also likely to see an increase in tyre prices and wiring harnesses in
1QFY12E.
4) The company has hedged 40% of its direct Yen exposure (~12% of net sales) at
~84 JPY/USD rate for FY2012E versus FY2011 average of 87, which is likely to
benefit Maruti’s margins. Maruti’s Yen exposure is ~23% of net sales and half of
the royalty expense is also paid in Yen. Hence, total JPY exposure is around 25.5%
of net sales. Therefore, a 1% depreciation in JPY/INR will benefit Maruti’s margins
by 25 bps. Yen has depreciated by 3% in April from 4QFY11 average levels.
5) The company also indicated that they plan to reduce imported Yen content by
1.5% of sales every year. We believe the process of localization of components will
increase after the tsunami in Japan which has made automotive companies around
the world realize the need for developing local sourcing.
6) We believe competitive intensity will also be likely muted for Maruti in 1HFY12E as
both Toyota and Honda have announced sharp cuts in production in India due to
component shortage from May onwards. Both companies have delayed their
launch of Etios hatchback and Honda Brio. Maruti has indicated they are not facing
any supply issues as of now.
7) The company will continue to invest in R&D and indicated R&D expense as a % of
sales will increase from current 1.1% of sales to 1.4% of sales in FY2012E of which
0.5% of sales will be recurring R&D.
8) Capex has been increased to Rs80 bn over FY2011-2013E versus Rs67 bn earlier.
The company has spent Rs22 bn in FY2011 and will spend another Rs40 bn in
FY2012E.
9) The company’s consolidated EPS for FY2011 was Rs82.4 (declined by 9% yoy).
Subsidiary EPS declined by 26% yoy due to restructuring of the general insurance
subsidiary. The company indicated that the general insurance subsidiary made a
profit of Rs600 mn in FY2010 and made no profits in FY2011 which led to the
sharp fall in profits of subsidiaries. The company indicated profits for this subsidiary
will reach earlier levels in FY2012E and hence we factor in Rs5/share of EPS for
subsidiaries in FY2012E.
Revise our earnings by +3-5% in FY2012-13E to factor in improvement in EBITDA
margins
We increase our earnings estimate by 3-5% over FY2012-13E as we increase our EBITDA
margin estimates by 40-70 bps factoring in depreciation in Yen. We have not factored in
benefits which may accrue from increase in localization as of now which could provide
upside to our earnings estimates.
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