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UBS Investment Research
Maruti Suzuki India
S everal headwinds: Downgrade to Neutral
Auto Dealer survey indicates falling footfalls and Sales conversion
Our Auto Dealer Survey indicates significant weakness in Maruti’s performance vs
the Industry. 77% of Maruti dealers reported decline in footfalls vs 45% overall.
54% of dealers reported decline in sales conversion vs 26% overall. (Refer India
Autos: 12th Auto Dealer Survey dated Oct 12, 2011). While we believe some of
this weakness is attributable to supply disruption for Manesar models, we believe
growth outlook for the co. is weaker than what we earlier expected.
Impact: Reduce FY12/13 EPS by 10%%/11%
We reduce our YoY volume growth for FY12/13 from -4%/14% to -8%/14%
respectively. We now expect Maruti’s PV market share to drop from 45% in FY11
to 40% in FY12. We remain sanguine on FY13 growth outlook for the co. helped
by new product launches in H2FY12 (Swift, Dzire and new UV).
Downgrade Rating to Neutral; 13% below consensus for FY13 EPS
We believe the stock is unlikely to perform in the near term till yen appreciation
impact is reflected in the nos. and clarity emerges on FY13 growth outlook.
According to the mgmt. Yen appreciation is likely to negatively impact EBITDA
margins by ~1% in Q2FY12 and ~2% in Q3FY12. We are now 17%/13% below
consensus for FY12/13 and expect significant earnings downgrades over the next
couple of quarters driven by weak growth and declining margins.
Valuation: Trading @16x FY12, Reduce PT to Rs 1,150 (from Rs 1,420)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.5%.
Downgrade to Neutral
We downgrade Maruti from Buy to Neutral and reduce our price target from
Rs 1,420 to Rs 1,150 following a significant cut to our earnings and
deteriorating growth outlook. We believe the stock is unlikely to perform till
impact of Yen appreciation is fully reflected in the earnings and there is
further clarity on FY13 growth outlook.
Our 12th UBS Auto Dealer Survey indicates significant weakness in demand
trends for Maruti. We believe demand for petrol driven cars will continue to
remain under pressure following further increase in petrol price and
increasing premium to diesel. We are therefore reducing our domestic
volume growth forecast for FY12/13 from -2%/16% to 7%/15%.
While Yen exposure is known to the market the full impact of the same will
only be fully reflected in the margins by Q3FY12. According to the company,
Yen appreciation is likely to negatively impact EBITDA margins by ~1% in
Q2FY12 and ~2% in Q3FY12.
We believe there is limited scope for price increases and commodity prices
may not decline meaningfully in Q3FY12 following sharp depreciation of
the Indian Rupee. We are therefore further reducing our EBITDA margin
assumptions for FY12/13 to 8.5%/9.2% from 8.9%/9.7% previously.
We believe valuations at 12.8x FY13 PE are not cheap given the growth and
competitive concerns for the company.
UBS Auto Dealer Survey indicates significant weakness
in demand for Maruti
Our Auto Dealer Survey indicates significant weakness in Maruti’s performance
vs the Industry. 77% of dealers reported decline in footfalls vs 45% overall. 54%
of dealers reported decline in sales conversion vs 26% overall. Maruti dealers
accounted for 34% of our sample. We believe things will remain weak in the
near term for the co. (Refer India Autos: 12th Auto Dealer Survey dated Oct 12,
2011).
While we believe some of this weakness is attributable to supply disruption for
Manesar models, we believe growth outlook for the co. is weaker than what we
earlier expected. Maruti clearly getting impacted the most given high exposure
to entry level car segment.
Petrol segment likely to remain under pressure
The govt. raised petrol prices by another ~5% on Sep 16, 2011. Petrol prices
are now up 30%YoY. This continues to be a significant headwind for the
hatchback segment. The hatchback car segment (Mini+Compact) is down
3%ytd. Majority of sales in this segment come from models which don’t
have diesel variants.
Demand is clearly shifting more towards diesel models. Segments which
have like UV’s and Sedans (Super compact and Mid-size) have large
proportion of volumes coming from diesel vehicles have been less impacted.
We believe demand in the entry level segment (Mini) may continue to
remain weak in the aftermath of rising petrol prices. Mini and Vans segment
for Maruti have not been impacted by labour issues till date. Demand for the
industry in the mini-segment (incl. Micro) is down 6%YoY in H1FY12 vs
Maruti decline of 7.2%YoY.
In Vans – industry growth has been led by launch of Maxximo vans by
M&M, while Maruti’s van growth has been negative in the last couple of
months (although still positive YoY for H1FY12)
Market share losses may not be recoupable
We believe demand could structurally shift more towards models with diesel
variants shunning the Mini segment (where there are no diesel variants).
Maruti had 72% share of the Mini (incl. micro) segment in H1FY12. This
segment accounted for 33.4% of the car market in H1FY12 down 400bps
YoY. This is likely to result in structural market share loss for Maruti. Also,
with the launch of Hyundai Eon, Maruti will lose market share in this
segment in H2.
We believe the loss of market share due to labour issues is likely to be
recoupable and therefore we believe the co. will like maintain market share
on a low base of FY12 despite new launches from Hyundai (Eon) and Honda
(Brio).
Valuations
We downgrade Maruti from Buy to Neutral and reduce our price target from
Rs 1,420 to Rs 1,150 following a significant cut to our earnings and
deteriorating industry growth outlook.
We believe the stock is unlikely to perform till impact of Yen appreciation is
fully reflected in the earnings and there is further clarity on FY13 growth
outlook.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers with UBS’s VCAM tool with a WACC
of 11.5%. Our 12-month price target implies Maruti will trade at ~14x FY13
earnings.
Maruti Suzuki India
Maruti Udyog Limited is the largest passenger car manufacturer in India with a
market share of over 50%. The company was formed in 1983 and commenced
operations in 1984, as a joint venture between the Government of India (GOI)
and Suzuki Motor Corporation. In 2002, GOI ceded majority control to Suzuki
by not subscribing to a rights issue. GOI subsequently sold 27.5% of its stake to
investors in an IPO. Suzuki owns 54.6% of Maruti. Suzuki selected Maruti to be
its small car manufacturing hub for the European market and also as an R&D
centre.
Statement of Risk
Higher raw material costs and slowdown in demand remain the key risks to our
estimates for Maruti. Increasing competitive pressure due to entry of newer
players in its core segment could further impact margins negatively. Significant
portion of exports are to EU and imports from Japan, hence euro depreciation
and yen appreciation will negatively impact company's margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Maruti Suzuki India
S everal headwinds: Downgrade to Neutral
Auto Dealer survey indicates falling footfalls and Sales conversion
Our Auto Dealer Survey indicates significant weakness in Maruti’s performance vs
the Industry. 77% of Maruti dealers reported decline in footfalls vs 45% overall.
54% of dealers reported decline in sales conversion vs 26% overall. (Refer India
Autos: 12th Auto Dealer Survey dated Oct 12, 2011). While we believe some of
this weakness is attributable to supply disruption for Manesar models, we believe
growth outlook for the co. is weaker than what we earlier expected.
Impact: Reduce FY12/13 EPS by 10%%/11%
We reduce our YoY volume growth for FY12/13 from -4%/14% to -8%/14%
respectively. We now expect Maruti’s PV market share to drop from 45% in FY11
to 40% in FY12. We remain sanguine on FY13 growth outlook for the co. helped
by new product launches in H2FY12 (Swift, Dzire and new UV).
Downgrade Rating to Neutral; 13% below consensus for FY13 EPS
We believe the stock is unlikely to perform in the near term till yen appreciation
impact is reflected in the nos. and clarity emerges on FY13 growth outlook.
According to the mgmt. Yen appreciation is likely to negatively impact EBITDA
margins by ~1% in Q2FY12 and ~2% in Q3FY12. We are now 17%/13% below
consensus for FY12/13 and expect significant earnings downgrades over the next
couple of quarters driven by weak growth and declining margins.
Valuation: Trading @16x FY12, Reduce PT to Rs 1,150 (from Rs 1,420)
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.5%.
Downgrade to Neutral
We downgrade Maruti from Buy to Neutral and reduce our price target from
Rs 1,420 to Rs 1,150 following a significant cut to our earnings and
deteriorating growth outlook. We believe the stock is unlikely to perform till
impact of Yen appreciation is fully reflected in the earnings and there is
further clarity on FY13 growth outlook.
Our 12th UBS Auto Dealer Survey indicates significant weakness in demand
trends for Maruti. We believe demand for petrol driven cars will continue to
remain under pressure following further increase in petrol price and
increasing premium to diesel. We are therefore reducing our domestic
volume growth forecast for FY12/13 from -2%/16% to 7%/15%.
While Yen exposure is known to the market the full impact of the same will
only be fully reflected in the margins by Q3FY12. According to the company,
Yen appreciation is likely to negatively impact EBITDA margins by ~1% in
Q2FY12 and ~2% in Q3FY12.
We believe there is limited scope for price increases and commodity prices
may not decline meaningfully in Q3FY12 following sharp depreciation of
the Indian Rupee. We are therefore further reducing our EBITDA margin
assumptions for FY12/13 to 8.5%/9.2% from 8.9%/9.7% previously.
We believe valuations at 12.8x FY13 PE are not cheap given the growth and
competitive concerns for the company.
UBS Auto Dealer Survey indicates significant weakness
in demand for Maruti
Our Auto Dealer Survey indicates significant weakness in Maruti’s performance
vs the Industry. 77% of dealers reported decline in footfalls vs 45% overall. 54%
of dealers reported decline in sales conversion vs 26% overall. Maruti dealers
accounted for 34% of our sample. We believe things will remain weak in the
near term for the co. (Refer India Autos: 12th Auto Dealer Survey dated Oct 12,
2011).
While we believe some of this weakness is attributable to supply disruption for
Manesar models, we believe growth outlook for the co. is weaker than what we
earlier expected. Maruti clearly getting impacted the most given high exposure
to entry level car segment.
Petrol segment likely to remain under pressure
The govt. raised petrol prices by another ~5% on Sep 16, 2011. Petrol prices
are now up 30%YoY. This continues to be a significant headwind for the
hatchback segment. The hatchback car segment (Mini+Compact) is down
3%ytd. Majority of sales in this segment come from models which don’t
have diesel variants.
Demand is clearly shifting more towards diesel models. Segments which
have like UV’s and Sedans (Super compact and Mid-size) have large
proportion of volumes coming from diesel vehicles have been less impacted.
We believe demand in the entry level segment (Mini) may continue to
remain weak in the aftermath of rising petrol prices. Mini and Vans segment
for Maruti have not been impacted by labour issues till date. Demand for the
industry in the mini-segment (incl. Micro) is down 6%YoY in H1FY12 vs
Maruti decline of 7.2%YoY.
In Vans – industry growth has been led by launch of Maxximo vans by
M&M, while Maruti’s van growth has been negative in the last couple of
months (although still positive YoY for H1FY12)
Market share losses may not be recoupable
We believe demand could structurally shift more towards models with diesel
variants shunning the Mini segment (where there are no diesel variants).
Maruti had 72% share of the Mini (incl. micro) segment in H1FY12. This
segment accounted for 33.4% of the car market in H1FY12 down 400bps
YoY. This is likely to result in structural market share loss for Maruti. Also,
with the launch of Hyundai Eon, Maruti will lose market share in this
segment in H2.
We believe the loss of market share due to labour issues is likely to be
recoupable and therefore we believe the co. will like maintain market share
on a low base of FY12 despite new launches from Hyundai (Eon) and Honda
(Brio).
Valuations
We downgrade Maruti from Buy to Neutral and reduce our price target from
Rs 1,420 to Rs 1,150 following a significant cut to our earnings and
deteriorating industry growth outlook.
We believe the stock is unlikely to perform till impact of Yen appreciation is
fully reflected in the earnings and there is further clarity on FY13 growth
outlook.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers with UBS’s VCAM tool with a WACC
of 11.5%. Our 12-month price target implies Maruti will trade at ~14x FY13
earnings.
Maruti Suzuki India
Maruti Udyog Limited is the largest passenger car manufacturer in India with a
market share of over 50%. The company was formed in 1983 and commenced
operations in 1984, as a joint venture between the Government of India (GOI)
and Suzuki Motor Corporation. In 2002, GOI ceded majority control to Suzuki
by not subscribing to a rights issue. GOI subsequently sold 27.5% of its stake to
investors in an IPO. Suzuki owns 54.6% of Maruti. Suzuki selected Maruti to be
its small car manufacturing hub for the European market and also as an R&D
centre.
Statement of Risk
Higher raw material costs and slowdown in demand remain the key risks to our
estimates for Maruti. Increasing competitive pressure due to entry of newer
players in its core segment could further impact margins negatively. Significant
portion of exports are to EU and imports from Japan, hence euro depreciation
and yen appreciation will negatively impact company's margins.
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