Maruti Suzuki India – Awaiting inventory correction ::RBS

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Maruti is suffering the effects of a sharp deterioration in demand and an adverse product mix due
to 1Q's workers strike. After also factoring in the strong yen and intensifying competition, we trim
our FY12 and FY13 EPS forecasts by 15%. With inventory correction looking likely, we cut our TP
to Rs1083.


Volumes may continue to decline for a few more months
Maruti’s 1Q domestic dispatches were flattish yoy due to weak demand for petrol cars and the
impact of the workers strike on diesel car supplies. Our channel checks indicate that in spite of a
steep hike in discounts, retail sales volumes lagged company dispatches by around 15% in 1Q,
thereby pushing dealer inventory substantially above the company norm of three weeks. We
believe this will lead to inventory correction in the coming months; hence, the yoy decline seen in
June may worsen before returning to normal levels in 3Q. Based on these assumptions, we trim
our sales volume growth estimates by 9% for FY12-13, which translates into growth of 3% in
FY12F and 10.5% in FY13F.
We believe the poor product mix will affect June quarter results
We estimate a 23% yoy drop in 1Q EPS to Rs14.1 as we expect margins to slip to 8.3%, down
210bp yoy and 150bp qoq given the poor product mix following the workers strike and higher
discounts on petrol cars. We expect margins to bottom out in 2Q as the impact of the strong yen
on imports plays out with the expiry of hedges in July, and as the company takes action to reduce
dealer inventory levels. Consequently, we trim our FY12-13F EPS 14-16%.
Short-term concerns to peak in 2Q; Hold maintained
The stock has underperformed the Sensex over the last seven quarters as the competition has
intensified since FY11, with industry volumes flattening in recent months. We believe the worst
will be over soon as competition in the compact car segment peaks due to new product launches
(Hyundai Ha, Honda Brio and GM Beat diesel are set for a 2Q debut) and Maruti feels the pain of
inventory correction and a strong yen. Based on our revised EPS forecasts (16% below
consensus for both FY12 and FY13), we trim our three-stage DCF-based TP to Rs1,083, which is
12.1x FY13F EPS. We expect qoq improvements from 3Q due to festivals, enhanced diesel
engine production capacity and new product launches. The current P/BV shows that valuation is
not yet attractive, and with 7% potential downside we stay at Hold.