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Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
Valuation looks fair after correction, still not compelling; Neutral
What's changed
Maruti Suzuki stock price is down 17% post its FY11 earnings announcement
vs the Sensex down 7%, mainly driven by worsening domestic car market
conditions with increasing discounts in our view. The stock is now close to our
12-month FY12E P/E based TP of Rs1,173, with our price target valuation being
among the most conservative vs Street expectations (Bloomberg).
Implications
We believe that over last 12-month period changes in RoE account for >80% in
variation of MSIL’s stock price (see “Maruti Suzuki: RoE is a key driver of
valuation: significant upgrade cycle unlikely”, dated April 27 2011). Based on
this regression analysis, we believe the current stock price implies FY12E RoE
of about 12%-14% vs GSE 14.8%, closer to across the cycle returns enjoyed by
the global auto industry (though higher than the about Japanese 10%
average in our view). However, over the next 12-24 months we believe
changes in RoE expectations will depend on the following: 1) Margins: we see
limited upside to our FY12-13E margins given: - A) permanent 2ppt increase in
royalty & R&D costs, with MSIL’s technology costs now being one of the
highest among Asian carmakers, in our view. We believe Maruti Suzuki may
have limited negotiating power with its technology supplier and parent,
Suzuki Motors in lowering royalty expenses significantly. B) A structural
increase in competition in the domestic car market, which combined with
slowing growth, may increase overall costs, threaten product pricing as well
as volume growth. 2) The asset turnover ratio which appears to be at an 8-
year peak could decline if demand growth further decelerates over FY2012-
13E.
Valuation
Stock is currently trading at 2.0x P/B vs the historical average of about 2.8x, its
historical trough of 1.5x and global peers trading at 1.8x. Our Neutral rating and
12-month FY2012E P/E-based TP of Rs1,173 remain unchanged.
Key risks
Higher/lower than expected demand and competitive pressure.
INVESTMENT LIST MEMBERSHIP
Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
Valuation looks fair after correction, still not compelling; Neutral
What's changed
Maruti Suzuki stock price is down 17% post its FY11 earnings announcement
vs the Sensex down 7%, mainly driven by worsening domestic car market
conditions with increasing discounts in our view. The stock is now close to our
12-month FY12E P/E based TP of Rs1,173, with our price target valuation being
among the most conservative vs Street expectations (Bloomberg).
Implications
We believe that over last 12-month period changes in RoE account for >80% in
variation of MSIL’s stock price (see “Maruti Suzuki: RoE is a key driver of
valuation: significant upgrade cycle unlikely”, dated April 27 2011). Based on
this regression analysis, we believe the current stock price implies FY12E RoE
of about 12%-14% vs GSE 14.8%, closer to across the cycle returns enjoyed by
the global auto industry (though higher than the about Japanese 10%
average in our view). However, over the next 12-24 months we believe
changes in RoE expectations will depend on the following: 1) Margins: we see
limited upside to our FY12-13E margins given: - A) permanent 2ppt increase in
royalty & R&D costs, with MSIL’s technology costs now being one of the
highest among Asian carmakers, in our view. We believe Maruti Suzuki may
have limited negotiating power with its technology supplier and parent,
Suzuki Motors in lowering royalty expenses significantly. B) A structural
increase in competition in the domestic car market, which combined with
slowing growth, may increase overall costs, threaten product pricing as well
as volume growth. 2) The asset turnover ratio which appears to be at an 8-
year peak could decline if demand growth further decelerates over FY2012-
13E.
Valuation
Stock is currently trading at 2.0x P/B vs the historical average of about 2.8x, its
historical trough of 1.5x and global peers trading at 1.8x. Our Neutral rating and
12-month FY2012E P/E-based TP of Rs1,173 remain unchanged.
Key risks
Higher/lower than expected demand and competitive pressure.
INVESTMENT LIST MEMBERSHIP
Neutral
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