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Maruti Suzuki India
Awaiting inventory correction
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.
Volumes may decline for a few more months
Maruti’s sales volumes declined in June due to the shut down of its plant. We believe
volumes may continue to fall for a few more months following dealer inventory build-up.
Given weak volumes and a strong yen, we trim EPS by 14-16% for FY12-13F. Hold.
Market share likely to remain under pressure
The sharp rise in petrol car ownership costs (up 5% in the last six months and 10.2% in the last
nine months for three-year total cost of ownership) has slowed domestic industry growth to 8% in
May 2011 (June SIAM data not yet available). With the onset of monsoons, we feel footfall will
remain weak and continue to impact demand in 2Q. Retail sales lagged company dispatches by
around 15% in 1Q. We expect inventory correction to happen soon; hence market share
correction looks imminent. This will be aggravated by new compact car launches planned by
Hyundai, GM and Honda in the coming months.
Margins could revisit FY09 lows as product mix deteriorates in 1Q
Given the poor product mix and cost pressures (steel and rupee depreciation against the yen), we
expect Maruti’s EBITDA margins to revisit the lows of 3QFY09. We expect a revival to begin in
3QFY12 as the company enhances diesel engine production capacity (for which customers are on
a waiting list).
Can festivals spur car demand?
We feel the festival period, starting in September, coupled with the company’s expanded diesel
engine capacity should help Maruti regain customers. However, the much needed dealer
inventory correction that we expect in the coming months (July and August) should lead to a
double-digit dip in volumes. We build in the launches of the new Swift and R3 in 2Q and 3Q,
respectively from the upcoming capacity expansion. This leads us to a volume growth forecast of
3% for FY12, which is lower than recent management guidance of 5%.
The poor 1H volume outlook has driven down our EPS forecast for FY12 by 15.7%, while lower
capacity utilisation and rupee depreciation has a bearing on our forecasts for FY13. When
compared with Bloomberg consensus, our forecasts are 16% lower for both FY12 and FY13.
Stock range-bound over the past four quarters
Maruti has underperformed the Sensex over the last seven quarters. The stock has been rangebound
between Rs1,100 and Rs1,400 over the past four quarters; hence our Hold rating. Recent
concerns about volume growth on account of the workers’ strike and Maruti’s Japanese parent
downgrading its FY12 estimates led the stock to retest the low end of this price band.
We feel the worst is not yet over. We expect the stock to bottom out in 2Q, as we expect volume
growth to witness a double-digit dip and as yen hedges roll off in July. We also expect competition
to peak in terms of new product launches in the compact car segment around this time. Until then,
we expect the stock to remain weak. The long-term forward PBV chart also indicates that
valuations are not yet conducive to buying.
Building on our revised EPS estimates and rolling forward our DCF model to FY14F, we trim our
target price to Rs1,083.
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