Maruti Suzuki: Second half likely to be better than first::Kotak Sec,

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Maruti Suzuki (MSIL)
Automobiles
Second half likely to be better than first. We expect volumes to improve by 9% yoy
between August 2011 and March 2012 driven by new product launches and strong
customer response to the new Swift. We expect margins to improve in FY2013E as
volumes recover, which is likely to lead to lower discounts and improvement in
operating margins. We maintain our BUY rating on the stock but revise our target price
marginally to Rs1,475 (Rs1,515 earlier) driven by 3-9% cut in our earnings estimates


New launches to boost volume growth in 2HFY12E
New Swift has recieved a very good response from customers and the company has already
accepted bookings for 50,000 units. Maruti Suzuki reported a 7% yoy decline in volumes during
April-July 2011, impacted by an economic slowdown and strike at the Manesar plant which has
resulted in a loss in production of its best-selling models of Swift and Dzire. We expect domestic
volumes to pick up in 2HFY12E (+9% yoy) as customer sentiment revives driven by a pick-up in
demand during the festive season, increase in diesel engine capacity and new model launches
(new Swift, new Dzire and new UV).
EBITDA margins to decline from 1QFY12 levels but likely to improve in FY2013E
We estimate a 270 bps negative impact on margins going forward due to a sharp appreciation of
Yen versus Rupee (-150 bps impact), increase in R&D expense (-20 bps impact) and sharp increase
in discounts in the domestic market (-100 bps impact). However, we believe Maruti will likely
offset this impact by localization of imported components (likely to positively impact margins by
100 bps), slight improvement in product mix (positive impact of 30 bps on margins) and decline in
raw material costs, especially rubber and aluminium (likely to add 90 bps to the margins). Hence,
we estimate EBITDA margins to decline by 50 bps from 1QFY12 levels over the next nine months.
We expect EBITDA margins to improve by 80 bps yoy in FY2013E driven by lower discounts and
cost-cutting benefits.
We maintain our BUY rating on the stock but revise our target price downwards
We maintain our BUY rating on the stock with a target price of Rs1,475 (from Rs1,515 earlier).
Our target price is based on 14X our FY2013E consolidated earnings estimate. We have revised
our consolidated earnings estimate to Rs84.9 and Rs105.3 (from Rs93.1 and Rs108.3 earlier) over
FY2012-13E factoring in a 3-4% cut in our volume forecasts and 40 bps decline in our EBITDA
margin estimate for FY2012E.


Sharp appreciation of Yen and higher discounts will likely impact margins in
2HFY12E
Yen has appreciated by 9% since 4QFY11 levels which is likely to impact margins in the
coming quarters. The company has hedged direct imports till October at a favorable rate,
however, vendor imports are still open. The company has hedged Euro and Dollar exports
for FY2012E at a favorable rate at the start of FY2012 and we do not foresee any impact on
exports due to currency movement. We expect a 150 bps negative impact on margins due
to sharp appreciation of Yen versus Rupee. The company has a net exposure of 27% of its
sales in Yen (8% of sales is direct imports, 5% of net sales is royalty expense and 14% of
net sales is indirect imports).
Discounts have also increased since 1QFY12 and we estimate average increase of
Rs1,000/vehicle qoq which could impact EBITDA margins by 100 bps in 2QFY12E. As
highlighted above, the share of diesel vehicles is expected to increase going forward while
Swift/Dzire volumes are also expected to increase in the product mix which will likely keep
average discounts/vehicle at Rs1,000/vehicle.
We estimate a 270 bps negative impact on margins going forward due to sharp appreciation
of Yen versus Rupee (-150 bps impact), increase in R&D expense (-20 bps impact) and sharp
increase in discounts in the domestic market (-100 bps impact). However, we believe Maruti
will likely offset the negative impact by localization of imported components (likely to have a
positive impact of 100 bps to the margins), slight improvement in product mix (likely to
positively impact margins by 30 bps) and decline in raw material costs, especially rubber and
aluminium (likely to add 90 bps to the margins). Hence, we estimate EBITDA margins to
decline by 50 bps from 1QFY12 levels over the next nine months.

Valuations attractive at current levels; maintain BUY
Stock trades at 13.6X FY2012E EPS and at 11X FY2013E EPS estimate given concerns of a
slowdown in passenger vehicle volume growth and flat earnings growth in FY2012E. We
believe macro environment is likely to improve with decline in fuel prices globally and likely
decline in interest rates from 4QFY12E which could boost pent-up demand. We believe
customers have deferred their purchases due to a sharp rise in cost of ownership of the
vehicle and we believe once cost of ownership starts declining, customer sentiment will
improve. We maintain our BUY rating on the stock with a target price of Rs1,475 (cut from
Rs1,515 earlier). Our target price is based on 14X our FY2013E consolidated earnings
estimate.