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Maruti Suzuki (MSIL)
Automobiles
Fuel price hike likely to dampen consumer sentiment. We believe the petrol price
hike of Rs3.14 km/ltr will dampen consumer sentiment in 2HFY2012E and recovery in
volume growth is likely to be delayed till 1QFY13E. We expect domestic passenger car
industry volumes to decline by 3% yoy (for the first time in 10 years) due to weak
consumer sentiment. We downgrade Maruti Suzuki to ADD (from BUY) as we expect a
sharp slowdown in volume growth in 2HFY12E before improving in FY2013E.
Festive season could disappoint due to a sharp increase in petrol prices in a short span of time
We expect passenger car volume growth to decline by as much as 4% yoy during Sep-March
2012E impacted by the further rise in cost of ownership of vehicles and weak economic sentiment.
Maruti Suzuki has also lost production of ~15,000 units in the first fortnight of September 2011,
in our view. Moreover, if the strike issue is not resolved immediately, Maruti Suzuki may not be
able to capitalize on the festive season in October-November 2011. We forecast Maruti Suzuki’s
volumes to decline by 8% yoy in FY2012E as we expect demand to get deferred till 1QFY13E
versus earlier expectations of pick-up in the festive season.
EBITDA margins to remain under pressure in 2HFY12E
We expect EBITDA margins to decline by 150 bps in 2HFY2012E versus 1QFY12E as we factor in –
(1) 250 bps impact due to yen appreciation versus INR, (2) 100 bps impact due to the increase in
discounts, partly offset by an increase in localization of components (100 bps positive impact) and
decline in raw material expenses (100 bps positive impact).
Volume growth likely to pick up in FY2013E
We believe passenger car volume growth will pick up in FY2013E as affordability of car increases
due to increases in salaries and a decline in inflation and interest rates while we expect car prices to
increase marginally. We forecast a 17% yoy increase in domestic passenger car volumes for
FY2013E and expect Maruti to lose 100 bps market share in FY2013E. We forecast a 15% yoy
increase in Maruti Suzuki’s domestic volumes in FY2013E.
We downgrade the stock to ADD (from BUY)
We have downgraded the stock to ADD (from BUY) as we have cut our consolidated earnings from
Rs84.9 and Rs105.3 to Rs71.0 and Rs95.3 for FY2012 and 2013E, respectively, driven by 11%
downward revision in our volume estimates and a 50 bps cut in our EBITDA margin assumptions in
FY2012E. We have revised our target price to Rs1,240 (from Rs1,475 earlier) based on a revision in
our earnings estimates.
Rising cost of ownership + weak economic sentiment to further impact volumes
Oil marketing companies have increased petrol prices by Rs3.14/litre due to rising global oil
prices and a sharp depreciation of INR versus the USD. We believe this will impact consumer
sentiment further and dampen the upcoming festive season. We believe the strike at
Maruti’s Manesar plant has worsened the situation as they may not be able to dispatch the
required vehicles to benefit from festivals coming up in October 2011. Hence, we see risks
to Maruti Suzuki’s volumes for 2HFY12E as consumer sentiment will take some time to
improve as two consecutive petrol price hikes in the past 2.5 months coupled with rising
interest rates and no abatement in inflation are likely to further dampen the consumer
sentiment.
We expect the domestic passenger industry to decline by 3% yoy in FY2012E for the first
time in 10 years. Maruti Suzuki has lost 4.3% market share during April-August 2011, partly
due to a strike at its plants and a sharp decline in demand for its Alto, Swift and Dzire
models. We expect the company to recover 100 bps market share in 2HFY12E as we expect
production issues to be sorted out and company to be in a position to meet demand for the
Swift/Dzire models.
We forecast a 8% yoy decline in Maruti’s volumes in FY2012E and expect the volumes to
grow by 14% yoy in FY2013E. We believe passenger car volumes are likely to recover in
FY2013E driven by – (1) a low base effect, (2) likely decline in interest rates, (3) increase in
affordability of the vehicle as we expect car prices to increase by 2% next year while salaries
are expected to increase by 10-12% and (4) a likely decline in fuel prices.
We believe EBITDA margins could be under pressure in 2HFY12E due to an increase in
discounts, slowdown in volume growth and sharp appreciation of Yen versus INR. Maruti
has hedged its exports exposure denominated in Euro and USD for FY2012E while yen
exposure is kept unhedged for 2HFY12E. Maruti Suzuki imports + royalty forms 27% of net
sales (8% of net sales is direct imports, 5% of net sales is royalty expense and rest 12% of
net sales is indirect imports). Maruti has hedged 13% of its direct exposure (including royalty)
till October 2011 at very favorable rates and hence we do not expect any major impact of
yen appreciation in 2QFY12. However, we now assume 250 bps hit due to yen appreciation
versus INR in 2HFY12E as we expect a ~10% appreciation of Yen versus INR in 2HFY12E
versus 1QFY12 average levels. We expect another 100 bps impact on margins due to an
increase in discounts in 2QFY12E. We expect 200 bps benefit in EBITDA margins from
increase in localization of imported components and decline in raw material expenses in
2HFY2012E. Hence, we expect EBITDA margins to decline by 150 bps in 2HFY12E versus
1QFY12E levels.
We forecast a 200 bps improvement in EBITDA margins in FY2013E versus 2HFY12E levels
driven by – (1) 150 bps improvement in margins due to further increase in localization and
(2) 50 bps improvement in margins due to a decline in discounts as demand improves. We
have assumed static raw material expenses and currency movements for FY2013E versus
2HFY12E as we expect Maruti to hedge currency exposures in FY2013E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki (MSIL)
Automobiles
Fuel price hike likely to dampen consumer sentiment. We believe the petrol price
hike of Rs3.14 km/ltr will dampen consumer sentiment in 2HFY2012E and recovery in
volume growth is likely to be delayed till 1QFY13E. We expect domestic passenger car
industry volumes to decline by 3% yoy (for the first time in 10 years) due to weak
consumer sentiment. We downgrade Maruti Suzuki to ADD (from BUY) as we expect a
sharp slowdown in volume growth in 2HFY12E before improving in FY2013E.
Festive season could disappoint due to a sharp increase in petrol prices in a short span of time
We expect passenger car volume growth to decline by as much as 4% yoy during Sep-March
2012E impacted by the further rise in cost of ownership of vehicles and weak economic sentiment.
Maruti Suzuki has also lost production of ~15,000 units in the first fortnight of September 2011,
in our view. Moreover, if the strike issue is not resolved immediately, Maruti Suzuki may not be
able to capitalize on the festive season in October-November 2011. We forecast Maruti Suzuki’s
volumes to decline by 8% yoy in FY2012E as we expect demand to get deferred till 1QFY13E
versus earlier expectations of pick-up in the festive season.
EBITDA margins to remain under pressure in 2HFY12E
We expect EBITDA margins to decline by 150 bps in 2HFY2012E versus 1QFY12E as we factor in –
(1) 250 bps impact due to yen appreciation versus INR, (2) 100 bps impact due to the increase in
discounts, partly offset by an increase in localization of components (100 bps positive impact) and
decline in raw material expenses (100 bps positive impact).
Volume growth likely to pick up in FY2013E
We believe passenger car volume growth will pick up in FY2013E as affordability of car increases
due to increases in salaries and a decline in inflation and interest rates while we expect car prices to
increase marginally. We forecast a 17% yoy increase in domestic passenger car volumes for
FY2013E and expect Maruti to lose 100 bps market share in FY2013E. We forecast a 15% yoy
increase in Maruti Suzuki’s domestic volumes in FY2013E.
We downgrade the stock to ADD (from BUY)
We have downgraded the stock to ADD (from BUY) as we have cut our consolidated earnings from
Rs84.9 and Rs105.3 to Rs71.0 and Rs95.3 for FY2012 and 2013E, respectively, driven by 11%
downward revision in our volume estimates and a 50 bps cut in our EBITDA margin assumptions in
FY2012E. We have revised our target price to Rs1,240 (from Rs1,475 earlier) based on a revision in
our earnings estimates.
Rising cost of ownership + weak economic sentiment to further impact volumes
Oil marketing companies have increased petrol prices by Rs3.14/litre due to rising global oil
prices and a sharp depreciation of INR versus the USD. We believe this will impact consumer
sentiment further and dampen the upcoming festive season. We believe the strike at
Maruti’s Manesar plant has worsened the situation as they may not be able to dispatch the
required vehicles to benefit from festivals coming up in October 2011. Hence, we see risks
to Maruti Suzuki’s volumes for 2HFY12E as consumer sentiment will take some time to
improve as two consecutive petrol price hikes in the past 2.5 months coupled with rising
interest rates and no abatement in inflation are likely to further dampen the consumer
sentiment.
We expect the domestic passenger industry to decline by 3% yoy in FY2012E for the first
time in 10 years. Maruti Suzuki has lost 4.3% market share during April-August 2011, partly
due to a strike at its plants and a sharp decline in demand for its Alto, Swift and Dzire
models. We expect the company to recover 100 bps market share in 2HFY12E as we expect
production issues to be sorted out and company to be in a position to meet demand for the
Swift/Dzire models.
We forecast a 8% yoy decline in Maruti’s volumes in FY2012E and expect the volumes to
grow by 14% yoy in FY2013E. We believe passenger car volumes are likely to recover in
FY2013E driven by – (1) a low base effect, (2) likely decline in interest rates, (3) increase in
affordability of the vehicle as we expect car prices to increase by 2% next year while salaries
are expected to increase by 10-12% and (4) a likely decline in fuel prices.
We believe EBITDA margins could be under pressure in 2HFY12E due to an increase in
discounts, slowdown in volume growth and sharp appreciation of Yen versus INR. Maruti
has hedged its exports exposure denominated in Euro and USD for FY2012E while yen
exposure is kept unhedged for 2HFY12E. Maruti Suzuki imports + royalty forms 27% of net
sales (8% of net sales is direct imports, 5% of net sales is royalty expense and rest 12% of
net sales is indirect imports). Maruti has hedged 13% of its direct exposure (including royalty)
till October 2011 at very favorable rates and hence we do not expect any major impact of
yen appreciation in 2QFY12. However, we now assume 250 bps hit due to yen appreciation
versus INR in 2HFY12E as we expect a ~10% appreciation of Yen versus INR in 2HFY12E
versus 1QFY12 average levels. We expect another 100 bps impact on margins due to an
increase in discounts in 2QFY12E. We expect 200 bps benefit in EBITDA margins from
increase in localization of imported components and decline in raw material expenses in
2HFY2012E. Hence, we expect EBITDA margins to decline by 150 bps in 2HFY12E versus
1QFY12E levels.
We forecast a 200 bps improvement in EBITDA margins in FY2013E versus 2HFY12E levels
driven by – (1) 150 bps improvement in margins due to further increase in localization and
(2) 50 bps improvement in margins due to a decline in discounts as demand improves. We
have assumed static raw material expenses and currency movements for FY2013E versus
2HFY12E as we expect Maruti to hedge currency exposures in FY2013E.
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