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UBS Investment Research
First Read: Maruti Suzuki India
M eeting with CFO: Yen weighs on margins
Yen appreciation likely to significantly impact Q2 and Q3FY12 margins
According to the company, near term margins could be significantly impacted due
to yen appreciation. Yen appreciation is likely to negatively impact EBITDA
margins by ~1% in Q2FY12 and ~2% in Q3FY12. Co. still working on counter
measures to mitigate part of the impact. This is inline with our view of weak
margins in FY12 (Refer Maruti – “Margin pressures priced in, maintain buy” dated
Sep 23, 2011).
Discounts unlikely to increase; Margins to improve longer term
Mgmt. expects volumes to remain flat in FY12. Mgmt. believes competitive
intensity is at peak right now and expects sales promotion cost to come down by
15%-20% next year as the demand bounces back. The co. doesn’t expect discounts
to increase from current levels. Mgmt. expects EBITDA margin to improve to 12%
by FY14 driven by 1) localization of significant yen imports 2) benefits of
economies of scale 3) cost reduction effort on specific models.
Maintain estimates, expect strong recovery in FY13
We expect demand to recover strongly on a low base of FY12 in FY13 driven by
new product launches – the new Swift (launched), new Dzire and RIII concept
based UV expected to be launched in H2FY12. We expect Q3FY12 volumes to be
significantly higher following resolution of labour issues and the appreciating yen
impact to be partly mitigated by declining commodity prices.
Valuation: Maintain Buy, PT 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%.
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
First Read: Maruti Suzuki India
M eeting with CFO: Yen weighs on margins
Yen appreciation likely to significantly impact Q2 and Q3FY12 margins
According to the company, near term margins could be significantly impacted due
to yen appreciation. Yen appreciation is likely to negatively impact EBITDA
margins by ~1% in Q2FY12 and ~2% in Q3FY12. Co. still working on counter
measures to mitigate part of the impact. This is inline with our view of weak
margins in FY12 (Refer Maruti – “Margin pressures priced in, maintain buy” dated
Sep 23, 2011).
Discounts unlikely to increase; Margins to improve longer term
Mgmt. expects volumes to remain flat in FY12. Mgmt. believes competitive
intensity is at peak right now and expects sales promotion cost to come down by
15%-20% next year as the demand bounces back. The co. doesn’t expect discounts
to increase from current levels. Mgmt. expects EBITDA margin to improve to 12%
by FY14 driven by 1) localization of significant yen imports 2) benefits of
economies of scale 3) cost reduction effort on specific models.
Maintain estimates, expect strong recovery in FY13
We expect demand to recover strongly on a low base of FY12 in FY13 driven by
new product launches – the new Swift (launched), new Dzire and RIII concept
based UV expected to be launched in H2FY12. We expect Q3FY12 volumes to be
significantly higher following resolution of labour issues and the appreciating yen
impact to be partly mitigated by declining commodity prices.
Valuation: Maintain Buy, PT 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%.
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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