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Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
Cutting ests on continuing strike; longer term concerns on margins
What's changed
1) Due to the persistent labour strike at Maruti Suzuki’s Manesar plant and
supplier Suzuki Power Train, we cut our volume estimates for Maruti
Suzuki to 1.2mn units for FY12E (from 1.35mn), with further potential
downside should the current impasse between labour and management
continue beyond Oct’11. 2) We believe this will prevent the company from
taking advantage of new capacity at Manesar in the face of demand uptick
driven by a) seasonally strong festive season, and b) launch of new Swift
model in Aug’11. 3) Due to lower volume estimates, we cut our FY12-14E
EPS by 13-15% (revised estimates 20% below Bloomberg consensus), and
12-m FY13E P/E-based TP by 9% to Rs1,071 (from Rs 1,173).
Implications
1) Industry-wide – The Society of Indian Automobile Manufacturers
believes rising instances of labour unrest in the industry (e.g. tool-down
strikes at MRF Tyres and Bosch India over the last two months) are also
due to restrictive employment regulations in India (source: CNBC TV18).
As per a study published by the World Bank in Economic Times in Feb’07,
there are 47 central laws and 157 state regulations dealing with labour
markets, which are at times contradictory and overlapping, preventing
efficient framing of employment contracts. 2) Company-specific – Any
worsening in labour disputes could potentially drive structural downside
risk to Maruti Suzuki’s margins from higher staff costs in the long run, in
our view. Maruti Suzuki’s current staff cost as a percentage of revenue is
one of the lowest among peers in India and Asia.
Valuation
The stock is currently trading at 1.8x FY13E P/B vs global peers trading at
1.5x and 7-year historical average at 2.9x.
Key risks
Greater/longer-than-expected impact of labour unrest and competition;
interest rate cycle; volatility in commodity and currency markets.
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
Cutting ests on continuing strike; longer term concerns on margins
What's changed
1) Due to the persistent labour strike at Maruti Suzuki’s Manesar plant and
supplier Suzuki Power Train, we cut our volume estimates for Maruti
Suzuki to 1.2mn units for FY12E (from 1.35mn), with further potential
downside should the current impasse between labour and management
continue beyond Oct’11. 2) We believe this will prevent the company from
taking advantage of new capacity at Manesar in the face of demand uptick
driven by a) seasonally strong festive season, and b) launch of new Swift
model in Aug’11. 3) Due to lower volume estimates, we cut our FY12-14E
EPS by 13-15% (revised estimates 20% below Bloomberg consensus), and
12-m FY13E P/E-based TP by 9% to Rs1,071 (from Rs 1,173).
Implications
1) Industry-wide – The Society of Indian Automobile Manufacturers
believes rising instances of labour unrest in the industry (e.g. tool-down
strikes at MRF Tyres and Bosch India over the last two months) are also
due to restrictive employment regulations in India (source: CNBC TV18).
As per a study published by the World Bank in Economic Times in Feb’07,
there are 47 central laws and 157 state regulations dealing with labour
markets, which are at times contradictory and overlapping, preventing
efficient framing of employment contracts. 2) Company-specific – Any
worsening in labour disputes could potentially drive structural downside
risk to Maruti Suzuki’s margins from higher staff costs in the long run, in
our view. Maruti Suzuki’s current staff cost as a percentage of revenue is
one of the lowest among peers in India and Asia.
Valuation
The stock is currently trading at 1.8x FY13E P/B vs global peers trading at
1.5x and 7-year historical average at 2.9x.
Key risks
Greater/longer-than-expected impact of labour unrest and competition;
interest rate cycle; volatility in commodity and currency markets.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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