Maruti Suzuki India- Don’t jump the gun yet :: Macquarie Research

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Maruti Suzuki India
Don’t jump the gun yet
Event
 Maruti reported 1Q FY12 results with adjusted PAT growth of 1.4%, which
was 15% ahead of consensus estimates. PAT was boosted by Rs400m of
capital gains on investments. EBITDA was marginally below our expectations,
and operating margins contracted 16bp. We maintain our contrarian
Underperform recommendation with a target price of Rs1,020 (13% potential
downside).
Impact
 1Q FY12 – weak operational performance. Net sales grew 3.4% YoY to
Rs83.6bn, driven by a 4.2% increase in average realisation, as the company
sold more diesel-powered cars last quarter. Adjusted EBITDA increased 1.2%
YoY to Rs6.5bn, as operating margins contracted by 16bp. RM as a % of sales
increased 80bp YoY, which was offset by lower royalty payout and ad spend.
 Car demand faces various headwinds (excise duty hike, interest rates).
MSIL management confirmed that higher petrol prices and rising interest rates
continue to hurt consumer sentiment. Although it is seeing a pick-up in
enquiries, the conversion rate continues to remain low. The Reserve Bank of
India on Tuesday hiked policy rates by 50bp, and we expect auto lending
rates to go up further. As per media reports, the government is likely to hike
the excise duty on passenger vehicles to keep the fiscal deficit under control.
 Margins to remain under-pressure. Gross margin is likely to remain weak
for at least another quarter, as the company’s current raw material contract is
valid until September 2011. Further, management added that the discounts on
cars have inched up higher in July given the weaker demand environment.
Advertising expense, which came down in 1Q FY12, is likely to go up again
due to the launch of the new Swift. Management maintained the full-year
royalty payout guidance between 5% and 5.5% of sales, which is higher than
4.8% in 1Q FY12.
 Further JPY appreciation will also hurt. The company has stated that it is
hedged for JPY exposure at a better rate than current spot rates until
September 2011. However, the recent appreciation of the JPY has increased
the downside risks for 2H FY12E. In 1Q FY12 the negative impact of a
stronger JPY was offset by a stronger Euro; going forward this will have a
small impact due to declining exports.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,020.00 based on a DCF methodology.
 Catalyst: Volume growth, excise duty changes and increase in lending rates.
Action and recommendation
 Reiterate Underperform. MSIL is currently trading at 14x FY12E earnings.
With a challenging operating environment due to sluggish volume growth
amidst rising interest rates, raw material cost pressure and increasing
competitive intensity, we believe current valuations are not justified.