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MARUTI SUZUKI INDIA LTD (MSIL)
PRICE: RS.1087 RECOMMENDATION: REDUCE
TARGET PRICE: RS.1120 FY12E P/E: 15.5X
q Unfavorable factors continue to impact the company's volumes. We expect
volume for the company to de-grow in FY12.
q New launches from the competition will only add to the pressure on the
volumes in the near to medium term.
q Strong Yen to have a negative impact on the company's margins going
into 2HFY12.
q In our earlier update, we had pointed towards downside risks to our
volume and operating margin estimates. We cut down our FY12 earnings
estimates by 18% on account of 1. Cut in volume estimates and 2.Adverse
forex movement (related to Yen).
q We continue to maintain our REDUCE rating on the stock with our revised
price target of Rs1,120 (earlier Rs1,200). At the target price of 1,120
the stock will trade at 16x its FY12 estimated earnings.
Rising petrol prices is a negative for MSIL
n Rise in petrol prices is expected to be a dampener for the company volumes in
FY12.
n Accordingly in line with rise in global crude prices, petrol prices in the past 18
months have risen significantly (by ~40%).
n For MSIL, more than 75% of the sales volume are generated by from petrol
driven cars. Recent hikes in petrol price have therefore had a negative impact on
the sales volumes in FY12.
n Increased gap between diesel and petrol prices has tilted the demand in favour
of diesel models. In models where both petrol and diesel engine option are available,
most of the companies including MSIL are witnessing diesel car sales forming
between 70-90% as against earlier range of 50-70%.
n However, MSIL will be able to take limited advantage of the same on account of
diesel engine capacity constraint. At the end of 1QFY12, the diesel engine capacity
stood at 240,000 units pa which the company planned to increase it to
290,000 units during 2QFY12. Still this forms about 20% of the company's capacity
(excluding the new capacity that was recently added at Manesar). So the
decline in petrol car sales would only marginally be compensated by increase in
diesel car sales for the company.
Strike at the Manesar plant not helping the cause either
n Maruti have lost on sales due to the strike at their Manesar plant. Initially the
strike in June 2011 led to loss as production of company's key models like Swift
and Dzire (both enjoying waiting period) were hampered.
n Subsequently post new Swift launch, the current ongoing strike once again hampered
the Swift production leading to significant increase in waiting period which
we believe would have led to loss of sales to the competitors.
n Despite the continuation of strike, the company has now reached planned production
levels of Swift, but production of SX4 and A-star models continues to
remain impacted. Company expects to start the production of SX4 and A-star in
a week's time.
Competition once again getting stiff
n Given moderating demand, launch of new models from the competitors is expected
to put further strain on the volumes in the near to medium term for MSIL.
n Hyundai is expected to launch a new model soon which will compete with
MSIL's largest selling Alto model. Honda is also expected to launch a new car in
the compact mid-premium segment.
n Slowing economy, high interest rates, increase in fuel prices, plant strike and
enhanced competition is expected to significantly impact the company's volumes
in FY12. We therefore lower our FY12 volume estimates from 1.36mn units to
1.16mn units - a fall of 8.8% over FY11 volumes.
Strong Yen to put pressure on margins in 2HFY12
n Japanese Yen (JPY) appreciated sharply in the past few months which is major
risk to the company's margin going in 2HFY12.
n Company's import exposure (both direct and indirect) accounts for 25% of sales
and the same are pre-dominantly JPY denominated.
n 2HFY12 unhedged JPY exposure is a major risk to the company's operating margin
towards the latter half of FY12. However recent depreciation of rupee is in
favor of the company.
n Slowing volumes for petrol cars is expected to prompt management to spend
more on marketing expenses leading towards further pressure on the margins.
n Accordingly we lower our FY12 operating margin assumption for the company
from 8.2% to 7.6%.
Valuation and Outlook
n We expect FY12 to be a difficult year for the car industry in general and MSIL in
particular. Various factors are impacting the company's volumes.
n Operating margin scenario too is not comfortable.
n In our earlier update, we had pointed towards downside risk to our volume and
margin assumptions. We cut down our FY12 earnings estimates by 18% to Rs70.
n We believe that the volume and margin related headwinds will keep the stock
under pressure in the medium term.
n We maintain our REDUCE rating on the stock with revised price target of
Rs1,120 (earlier Rs1,200). At the target price of 1,120 the stock will trade at 16x
its FY12 estimated earnings which is in line with historical average PE multiple.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MARUTI SUZUKI INDIA LTD (MSIL)
PRICE: RS.1087 RECOMMENDATION: REDUCE
TARGET PRICE: RS.1120 FY12E P/E: 15.5X
q Unfavorable factors continue to impact the company's volumes. We expect
volume for the company to de-grow in FY12.
q New launches from the competition will only add to the pressure on the
volumes in the near to medium term.
q Strong Yen to have a negative impact on the company's margins going
into 2HFY12.
q In our earlier update, we had pointed towards downside risks to our
volume and operating margin estimates. We cut down our FY12 earnings
estimates by 18% on account of 1. Cut in volume estimates and 2.Adverse
forex movement (related to Yen).
q We continue to maintain our REDUCE rating on the stock with our revised
price target of Rs1,120 (earlier Rs1,200). At the target price of 1,120
the stock will trade at 16x its FY12 estimated earnings.
Rising petrol prices is a negative for MSIL
n Rise in petrol prices is expected to be a dampener for the company volumes in
FY12.
n Accordingly in line with rise in global crude prices, petrol prices in the past 18
months have risen significantly (by ~40%).
n For MSIL, more than 75% of the sales volume are generated by from petrol
driven cars. Recent hikes in petrol price have therefore had a negative impact on
the sales volumes in FY12.
n Increased gap between diesel and petrol prices has tilted the demand in favour
of diesel models. In models where both petrol and diesel engine option are available,
most of the companies including MSIL are witnessing diesel car sales forming
between 70-90% as against earlier range of 50-70%.
n However, MSIL will be able to take limited advantage of the same on account of
diesel engine capacity constraint. At the end of 1QFY12, the diesel engine capacity
stood at 240,000 units pa which the company planned to increase it to
290,000 units during 2QFY12. Still this forms about 20% of the company's capacity
(excluding the new capacity that was recently added at Manesar). So the
decline in petrol car sales would only marginally be compensated by increase in
diesel car sales for the company.
Strike at the Manesar plant not helping the cause either
n Maruti have lost on sales due to the strike at their Manesar plant. Initially the
strike in June 2011 led to loss as production of company's key models like Swift
and Dzire (both enjoying waiting period) were hampered.
n Subsequently post new Swift launch, the current ongoing strike once again hampered
the Swift production leading to significant increase in waiting period which
we believe would have led to loss of sales to the competitors.
n Despite the continuation of strike, the company has now reached planned production
levels of Swift, but production of SX4 and A-star models continues to
remain impacted. Company expects to start the production of SX4 and A-star in
a week's time.
Competition once again getting stiff
n Given moderating demand, launch of new models from the competitors is expected
to put further strain on the volumes in the near to medium term for MSIL.
n Hyundai is expected to launch a new model soon which will compete with
MSIL's largest selling Alto model. Honda is also expected to launch a new car in
the compact mid-premium segment.
n Slowing economy, high interest rates, increase in fuel prices, plant strike and
enhanced competition is expected to significantly impact the company's volumes
in FY12. We therefore lower our FY12 volume estimates from 1.36mn units to
1.16mn units - a fall of 8.8% over FY11 volumes.
Strong Yen to put pressure on margins in 2HFY12
n Japanese Yen (JPY) appreciated sharply in the past few months which is major
risk to the company's margin going in 2HFY12.
n Company's import exposure (both direct and indirect) accounts for 25% of sales
and the same are pre-dominantly JPY denominated.
n 2HFY12 unhedged JPY exposure is a major risk to the company's operating margin
towards the latter half of FY12. However recent depreciation of rupee is in
favor of the company.
n Slowing volumes for petrol cars is expected to prompt management to spend
more on marketing expenses leading towards further pressure on the margins.
n Accordingly we lower our FY12 operating margin assumption for the company
from 8.2% to 7.6%.
Valuation and Outlook
n We expect FY12 to be a difficult year for the car industry in general and MSIL in
particular. Various factors are impacting the company's volumes.
n Operating margin scenario too is not comfortable.
n In our earlier update, we had pointed towards downside risk to our volume and
margin assumptions. We cut down our FY12 earnings estimates by 18% to Rs70.
n We believe that the volume and margin related headwinds will keep the stock
under pressure in the medium term.
n We maintain our REDUCE rating on the stock with revised price target of
Rs1,120 (earlier Rs1,200). At the target price of 1,120 the stock will trade at 16x
its FY12 estimated earnings which is in line with historical average PE multiple.
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