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Maruti's 4Q EBIT result was 5% below our forecast as higher discounts to attract customers affect
profitability. In a rising fuel and interest rate scenario, internal cost-cutting measures at best can
limit damage from weak demand and higher discounts. We remain cautious and marginally
reduce our EPS forecast and TP.
4QFY11 results disappoint operationally, but lower tax boosts PAT
At Rs6.93bn, Maruti Suzuki’s EBIT result for 4QFY11, adjusted for one-time gains due to a
gratuity provision reversal (Rs200m) and depreciation policy change for vendor tools (Rs500m),
was 4.5% lower than our forecast. However, lower taxation due to higher R&D spend leads to
normalised PAT of Rs6.4bn vs the RBS forecast of Rs6.17bn. The EBITDA margin dipped 70bp
qoq to 9.3%, adjusted for a one-time gain from vendors, for tool buyback. EPS for the 4Q was
Rs22.1.
Car demand environment is under stress; margins to remain dampened
Rising fuel and interest rates coupled with vehicle cost increases has led to a sharp rise in total
cost of car ownership in recent quarters. Management reiterated during the earnings call that this
has led to lower foot traffic at showrooms and conversion into sales, forcing a rise in
discounts/incentives. We feel this will eat into operating leverage extended by the company’s
higher manufacturing capacity in 1HFY12. Building in pressure from high commodity prices and
R&D expenses, we trim our EBIT forecast about 4% for FY12-13 despite higher volumes from
increased capacity. However, with rising R&D expenses providing a tax shield, our EPS revision
is limited to 3%.
Short term is challenging; waiting for macro factors to turn positive; maintain Hold
Our industry channel checks and management contact reiterate a weak demand scenario for cars
in the short term, forcing a higher discount for incumbents, given new models and capacity from
new players. We trim our DCF-based TP to reflect our EPS revision. On our revised EPS
forecast, although the valuation looks comfortable at 14.5x FY12F, given Maruti’s ability to
overcome cost pressure and a cash-rich balance sheet to fight the competition, we wait for
triggers in the form of macro factors to turn positive for the segment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti's 4Q EBIT result was 5% below our forecast as higher discounts to attract customers affect
profitability. In a rising fuel and interest rate scenario, internal cost-cutting measures at best can
limit damage from weak demand and higher discounts. We remain cautious and marginally
reduce our EPS forecast and TP.
4QFY11 results disappoint operationally, but lower tax boosts PAT
At Rs6.93bn, Maruti Suzuki’s EBIT result for 4QFY11, adjusted for one-time gains due to a
gratuity provision reversal (Rs200m) and depreciation policy change for vendor tools (Rs500m),
was 4.5% lower than our forecast. However, lower taxation due to higher R&D spend leads to
normalised PAT of Rs6.4bn vs the RBS forecast of Rs6.17bn. The EBITDA margin dipped 70bp
qoq to 9.3%, adjusted for a one-time gain from vendors, for tool buyback. EPS for the 4Q was
Rs22.1.
Car demand environment is under stress; margins to remain dampened
Rising fuel and interest rates coupled with vehicle cost increases has led to a sharp rise in total
cost of car ownership in recent quarters. Management reiterated during the earnings call that this
has led to lower foot traffic at showrooms and conversion into sales, forcing a rise in
discounts/incentives. We feel this will eat into operating leverage extended by the company’s
higher manufacturing capacity in 1HFY12. Building in pressure from high commodity prices and
R&D expenses, we trim our EBIT forecast about 4% for FY12-13 despite higher volumes from
increased capacity. However, with rising R&D expenses providing a tax shield, our EPS revision
is limited to 3%.
Short term is challenging; waiting for macro factors to turn positive; maintain Hold
Our industry channel checks and management contact reiterate a weak demand scenario for cars
in the short term, forcing a higher discount for incumbents, given new models and capacity from
new players. We trim our DCF-based TP to reflect our EPS revision. On our revised EPS
forecast, although the valuation looks comfortable at 14.5x FY12F, given Maruti’s ability to
overcome cost pressure and a cash-rich balance sheet to fight the competition, we wait for
triggers in the form of macro factors to turn positive for the segment.
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