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Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
Labor concerns with weaker demand and competition; stay Neutral
What's changed
We revise our EPS estimates for Maruti Suzuki for FY12-14 by -9% to 7%,
mainly on lower demand and temporary labor disruptions at its plant in
Manesar. Increased fuel and interest costs have slowed demand growth
for Indian cars, with YTD volume growth of -1% yoy vs +31% in FY11. Over
the last two months, a 28% price cut by Honda on the Jazz, and diesel
hatchback launches by GM and Toyota provide further evidence of a
structural increase in competition in the domestic car market, in our view.
There are also significant challenges at the Manesar plant where workers
are demanding a new union. Production ceased on August 29 after
management dismissed 21 employees (on charges of deliberate
slowdowns and production sabotage) and required c.950 workers to sign a
Good Conduct Bond. There is also a one-day production hault at its
Gurgaon plant on September 16 due to a strike at its vendor Suzuki
Powertrain India Ltd. So far, near-term production losses have been offset
partially by additional hiring and advancing the capacity additions at the
Manesar plant.
Implications
Beyond the near-term impact on production and earnings, we believe
recent labour issues could mark a new low in industrial relations, after the
previous significant episode of labor unrest in September 2000. We
continue to watch for potential risks that may arise on this front.
Valuation
The stock currently trades on a 1.8x FY13E P/B vs the ten-year historical
average of 2.9x, with an FY13E RoE at 14.8% vs a historical average of
19.5%. (For valuation details please see RoE is a key driver of valuation:
significant upgrade cycle unlikely published April 26, 2011). Our Neutral
rating and 12-month P/E-based price target of Rs1,173 are unchanged.
Key risks
Higher/lower-than-expected demand and competitive pressure.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
Labor concerns with weaker demand and competition; stay Neutral
What's changed
We revise our EPS estimates for Maruti Suzuki for FY12-14 by -9% to 7%,
mainly on lower demand and temporary labor disruptions at its plant in
Manesar. Increased fuel and interest costs have slowed demand growth
for Indian cars, with YTD volume growth of -1% yoy vs +31% in FY11. Over
the last two months, a 28% price cut by Honda on the Jazz, and diesel
hatchback launches by GM and Toyota provide further evidence of a
structural increase in competition in the domestic car market, in our view.
There are also significant challenges at the Manesar plant where workers
are demanding a new union. Production ceased on August 29 after
management dismissed 21 employees (on charges of deliberate
slowdowns and production sabotage) and required c.950 workers to sign a
Good Conduct Bond. There is also a one-day production hault at its
Gurgaon plant on September 16 due to a strike at its vendor Suzuki
Powertrain India Ltd. So far, near-term production losses have been offset
partially by additional hiring and advancing the capacity additions at the
Manesar plant.
Implications
Beyond the near-term impact on production and earnings, we believe
recent labour issues could mark a new low in industrial relations, after the
previous significant episode of labor unrest in September 2000. We
continue to watch for potential risks that may arise on this front.
Valuation
The stock currently trades on a 1.8x FY13E P/B vs the ten-year historical
average of 2.9x, with an FY13E RoE at 14.8% vs a historical average of
19.5%. (For valuation details please see RoE is a key driver of valuation:
significant upgrade cycle unlikely published April 26, 2011). Our Neutral
rating and 12-month P/E-based price target of Rs1,173 are unchanged.
Key risks
Higher/lower-than-expected demand and competitive pressure.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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