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Maruti Suzuki India
HMC confirms slower growth outlook
Event
We hosted a conference call with the management of Hyundai Motor
Company (HMC) to get their perspective on the Indian car market. Hyundai is
the 2nd largest car player in India behind Maruti Suzuki. Hyundai confirmed the
launch of their small car (800cc) in 2H2011 that would compete with Maruti’s
largest selling car Alto. HMC expects 6%YoY volume growth in India in CY11.
We expect competitive intensity in the Indian car market to rise significantly
post HMC’s new small car launch. We reiterate Underperform rating on MSIL.
Impact
Slowdown in car segment confirmed by Hyundai. Hyundai’s subdued
growth outlook of 6% for CY11 follows recent volume growth guidance cut
from 14% to 5% by MSIL. During the 1QFY12, HMC has grown 12.2% in the
domestic market as against 3.2% growth for MSIL. Rising interest rates and
fuel prices remain the key concerns for the passenger car market in India.
Hyundai India gearing for next phase of growth. HMC is planning to set up
a diesel engine plant in India by the end of CY12 to address the increasingly
rising demand of diesel vehicles in India. On domestic car capacity constraint,
company said that it can shift exports to other locations (eg shifted i20 to
Turkey) and use Indian capacity of 600,000 units for the domestic market.
Hyundai will also increase its dealership by 20 to 340 dealers by end 2011.
Three new launches planned for India. Hyundai is planning to launch small
car codenamed (HA) in 4QCY11, which will directly compete against Maruti
Alto. After the recent successful launch of new Verna (sells ~4,000 units a
month), the company has stated its forthcoming launches of new Santa FE
(SUV) and Elantra next year as it wants to improve its product mix.
Growing competition – pressure on Maruti to continue. We believe
competitive pressure on Maruti is not limited to Hyundai, as other players like
Toyota, Ford and Volkswagen are putting pressure on Maruti in the small car
segment. Aggressive dealership network expansion plans of these players will
also impact Maruti’s market share (eg Volkswagen and Toyota are planning to
add 30 and 25 dealerships this year to reach 100 and 175 by CY11end).
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs1,020.00 based on a DCF methodology.
Catalyst: Weak quarterly results
Action and recommendation
Underperform maintained. Maruti currently trades at 13.7x FY12E earnings,
a premium to its Indian auto peers. With challenging operating environment
and potential downside risks to earnings, we believe the current valuations
are not justified. Our target price of Rs1,020 provides 13% downside
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