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Maruti Suzuki India
Channel checks: slowdown in sales
Event
We have done extensive checks with car dealerships in the ten largest cities
of the country. Our channel checks suggest there has been a sharp slowdown
in car demand, especially for the petrol variants, given a steep increase in
petrol prices. We are cutting our FY12 volume growth assumption for MSIL to
9% from 16% earlier. We have cut our FY12 EPS estimate by 9% to Rs85,
which is 9% below consensus estimates. We reiterate our contrarian
Underperform rating with a revised target price of Rs1,020 (Rs1,080 earlier).
Impact
Car sales hit by increase in petrol prices. Car sales growth has been weak
over the last two months, with YoY growth in April–May falling to 10%, from a
growth of 26% last year. Retail demand has been impacted by the rise in
interest rates and petrol price hikes. Our channel checks suggest that diesel
car demand is still good, but petrol variants have been badly hit. We estimate
that the ownership cost of a petrol car has gone up 20% YoY.
Maruti growing even slower than the industry. Maruti’s domestic sales
growth has lagged industry growth over the last two months, with sales growth
of only 4% YoY. As 80% of cars sold by Maruti are petrol powered, we are not
surprised by Maruti’s slower growth. The ongoing workers’ strike at the Manesar
plant that produces most diesel variants should further impact Maruti’s nearterm
sales growth prospects. With the impending launch of three new small cars
– Toyota Liva, Honda Brio and Hyundai’s 800cc car – we expect Maruti’s
market share to come under further pressure in the coming months.
Rising inventories, growing discounts. Our channel checks suggest that
the inventory level for petrol cars at the dealerships has been rising over the
last 3–4 months, as retail sales have been much weaker than the plant
dispatch volumes. Due to the slowdown in growth, companies have increased
the cash discount and freebies offered to attract customers for petrol cars.
No respite in margins for Maruti. Contrary to street expectations, we believe
MSIL’s EBITDA margins will decline further this year. The average customer
discount has been rising across brands as a result of competition and slowing
demand. Further, higher commodity prices, rise in R&D costs and a stronger
Yen should drive margin decline of 40bp YoY in FY12E, by our estimates.
Earnings and target price revision
We have cut our FY12E EPS by 9% and target price by 6% to Rs1,020/sh.
Price catalyst
12-month price target: Rs1,020.00 based on a DCF methodology.
Catalyst: Monthly sales numbers and end of strike at the Manesar plant.
Action and recommendation
Underperform maintained. Maruti currently trades at 14.4x FY12E earnings,
a premium to its Indian auto peers. With the challenging operating
environment, we believe the current valuations are not justified.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki India
Channel checks: slowdown in sales
Event
We have done extensive checks with car dealerships in the ten largest cities
of the country. Our channel checks suggest there has been a sharp slowdown
in car demand, especially for the petrol variants, given a steep increase in
petrol prices. We are cutting our FY12 volume growth assumption for MSIL to
9% from 16% earlier. We have cut our FY12 EPS estimate by 9% to Rs85,
which is 9% below consensus estimates. We reiterate our contrarian
Underperform rating with a revised target price of Rs1,020 (Rs1,080 earlier).
Impact
Car sales hit by increase in petrol prices. Car sales growth has been weak
over the last two months, with YoY growth in April–May falling to 10%, from a
growth of 26% last year. Retail demand has been impacted by the rise in
interest rates and petrol price hikes. Our channel checks suggest that diesel
car demand is still good, but petrol variants have been badly hit. We estimate
that the ownership cost of a petrol car has gone up 20% YoY.
Maruti growing even slower than the industry. Maruti’s domestic sales
growth has lagged industry growth over the last two months, with sales growth
of only 4% YoY. As 80% of cars sold by Maruti are petrol powered, we are not
surprised by Maruti’s slower growth. The ongoing workers’ strike at the Manesar
plant that produces most diesel variants should further impact Maruti’s nearterm
sales growth prospects. With the impending launch of three new small cars
– Toyota Liva, Honda Brio and Hyundai’s 800cc car – we expect Maruti’s
market share to come under further pressure in the coming months.
Rising inventories, growing discounts. Our channel checks suggest that
the inventory level for petrol cars at the dealerships has been rising over the
last 3–4 months, as retail sales have been much weaker than the plant
dispatch volumes. Due to the slowdown in growth, companies have increased
the cash discount and freebies offered to attract customers for petrol cars.
No respite in margins for Maruti. Contrary to street expectations, we believe
MSIL’s EBITDA margins will decline further this year. The average customer
discount has been rising across brands as a result of competition and slowing
demand. Further, higher commodity prices, rise in R&D costs and a stronger
Yen should drive margin decline of 40bp YoY in FY12E, by our estimates.
Earnings and target price revision
We have cut our FY12E EPS by 9% and target price by 6% to Rs1,020/sh.
Price catalyst
12-month price target: Rs1,020.00 based on a DCF methodology.
Catalyst: Monthly sales numbers and end of strike at the Manesar plant.
Action and recommendation
Underperform maintained. Maruti currently trades at 14.4x FY12E earnings,
a premium to its Indian auto peers. With the challenging operating
environment, we believe the current valuations are not justified.
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