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MARUTI SUZUKI INDIA LIMITED
PRICE: RS.1158 RECOMMENDATION: REDUCE
TARGET PRICE: RS.1200 FY12E P/E: 13.5X
q Slowing economy, higher interest rates and costlier fuel is having a
negative bearing on the passenger car demand in the domestic market.
q Company's YTD FY12 performance on the volume front has been hit by
various issues. Even though the new Swift is expected to help company
improve volumes, we believe the negative macro sentiment will keep the
growth rate subdued in FY12.
q Yen exposure (on import side) has remained a worry for the company in
the past few quarters. Sharp appreciation in yen is making the situation
more difficult for the company.
q We believe that slowing volumes, stiff competition and adverse forex
movement will remain a drag on the company's margin in FY12.
q Given the current unfavorable scenario, we expect the stock to remain
under pressure in the near to medium term. We continue with our REDUCE
rating on the stock with an unchanged price target of Rs1,200
(based on 14x FY12E earnings).
Volumes to improve in absolute terms but growth to remain under
pressure
n Passenger car industry volumes in FY12 have been hit by slowing economy,
steep rise in interest rates in a short span and increase in petrol prices. MSIL's
FY12 YTD volumes are down by 7%.
n Apart from the general slowdown in the car demand, MSIL's FY12 YTD volume
drop of 7% is also due to 1.Strike at their Manesar plant 2.Shifting of Dzire production
from Manesar to Gurgaon and 3.Discontinuation of old swift dispatches
in wake of new swift launch. While these factors are unlikely to occur going forward,
the company's absolute volumes are expected to improve.
n However FY12 growth outlook for the passenger car industry continue to remain
grim. Company claims that inquiries remain healthy but customers are deferring
buying decisions on reasons mentioned above
n For MSIL, we have factored in a 6.7% volume growth in FY12. During the first
four months of FY12, the volumes are down by 7% and therefore the company
needs to achieve a 12.7% volume growth for the balance part of FY12 which in
our view is not an easy task.
n While we believe that the launch of new Swift will aid volumes, but still the sentiment
for car demand remains subdued. We also need to take note that the
growth needs to come on a higher 2HFY11 base.
n On the exports front too, the situation is not rosy. Even though the company has
ventured into newer markets, the volumes on the export side in FY12 is expected
to de-grow.
Higher production to reduce waiting period on Swift
n Recently the company launched a new Swift after investing Rs5.5bn for the
same.
n On an average, the company was selling around 12,000 units on a monthly basis
of the earlier version.
n With the launch of new Swift the company has decided to increase production to
17,000 - 18,000 units per month. This step will help the company bring down the
waiting period on Swift to a significant extent.
n Currently the company has around 50,000 booking for the new Swift.
Strong yen can be drag on the margins in 2HFY12
n MSIL's operating margins has been under pressure since 1QFY11. Initially the
increase in input cost and higher royalty outgo were putting pressure on margins.
Now that the commodity prices have stabilized, the pressure going ahead could
come in from the adverse forex movement
n Strong yen could be a headwind for the company's margins going into 2HFY12.
Company's exposure on the yen side is ~25% of its net sales (10% direct and
15% indirect). Company's 2HFY12 exposure on the yen side stands open and
therefore strong yen is posing serious challenges to the company’s expected
margin towards the latter half of FY12
n In 1QFY12, the company reported EBITDA margin of 7.7% as against 8.4% reported
in FY11. In our estimates, we have assumed EBITDA margin of 8.2%. If
yen continues to stay at the current level, we see downside risk to our margin
assumptions.
Valuation
n At the CMP of Rs.1,158 the stock trades at 13.5x expected FY12 EPS of 85.6
and at EV/EBITDA of 8.2.
n Concern over volume and margins is expected to limit the upside in the stock in
the medium term.
n We re-iterate our REDUCE rating with an unchanged price target of Rs1,200
(based on 14x FY12E earnings).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MARUTI SUZUKI INDIA LIMITED
PRICE: RS.1158 RECOMMENDATION: REDUCE
TARGET PRICE: RS.1200 FY12E P/E: 13.5X
q Slowing economy, higher interest rates and costlier fuel is having a
negative bearing on the passenger car demand in the domestic market.
q Company's YTD FY12 performance on the volume front has been hit by
various issues. Even though the new Swift is expected to help company
improve volumes, we believe the negative macro sentiment will keep the
growth rate subdued in FY12.
q Yen exposure (on import side) has remained a worry for the company in
the past few quarters. Sharp appreciation in yen is making the situation
more difficult for the company.
q We believe that slowing volumes, stiff competition and adverse forex
movement will remain a drag on the company's margin in FY12.
q Given the current unfavorable scenario, we expect the stock to remain
under pressure in the near to medium term. We continue with our REDUCE
rating on the stock with an unchanged price target of Rs1,200
(based on 14x FY12E earnings).
Volumes to improve in absolute terms but growth to remain under
pressure
n Passenger car industry volumes in FY12 have been hit by slowing economy,
steep rise in interest rates in a short span and increase in petrol prices. MSIL's
FY12 YTD volumes are down by 7%.
n Apart from the general slowdown in the car demand, MSIL's FY12 YTD volume
drop of 7% is also due to 1.Strike at their Manesar plant 2.Shifting of Dzire production
from Manesar to Gurgaon and 3.Discontinuation of old swift dispatches
in wake of new swift launch. While these factors are unlikely to occur going forward,
the company's absolute volumes are expected to improve.
n However FY12 growth outlook for the passenger car industry continue to remain
grim. Company claims that inquiries remain healthy but customers are deferring
buying decisions on reasons mentioned above
n For MSIL, we have factored in a 6.7% volume growth in FY12. During the first
four months of FY12, the volumes are down by 7% and therefore the company
needs to achieve a 12.7% volume growth for the balance part of FY12 which in
our view is not an easy task.
n While we believe that the launch of new Swift will aid volumes, but still the sentiment
for car demand remains subdued. We also need to take note that the
growth needs to come on a higher 2HFY11 base.
n On the exports front too, the situation is not rosy. Even though the company has
ventured into newer markets, the volumes on the export side in FY12 is expected
to de-grow.
Higher production to reduce waiting period on Swift
n Recently the company launched a new Swift after investing Rs5.5bn for the
same.
n On an average, the company was selling around 12,000 units on a monthly basis
of the earlier version.
n With the launch of new Swift the company has decided to increase production to
17,000 - 18,000 units per month. This step will help the company bring down the
waiting period on Swift to a significant extent.
n Currently the company has around 50,000 booking for the new Swift.
Strong yen can be drag on the margins in 2HFY12
n MSIL's operating margins has been under pressure since 1QFY11. Initially the
increase in input cost and higher royalty outgo were putting pressure on margins.
Now that the commodity prices have stabilized, the pressure going ahead could
come in from the adverse forex movement
n Strong yen could be a headwind for the company's margins going into 2HFY12.
Company's exposure on the yen side is ~25% of its net sales (10% direct and
15% indirect). Company's 2HFY12 exposure on the yen side stands open and
therefore strong yen is posing serious challenges to the company’s expected
margin towards the latter half of FY12
n In 1QFY12, the company reported EBITDA margin of 7.7% as against 8.4% reported
in FY11. In our estimates, we have assumed EBITDA margin of 8.2%. If
yen continues to stay at the current level, we see downside risk to our margin
assumptions.
Valuation
n At the CMP of Rs.1,158 the stock trades at 13.5x expected FY12 EPS of 85.6
and at EV/EBITDA of 8.2.
n Concern over volume and margins is expected to limit the upside in the stock in
the medium term.
n We re-iterate our REDUCE rating with an unchanged price target of Rs1,200
(based on 14x FY12E earnings).
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