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Product launches and diesel vehicles to drive recovery
MSIL’s earnings growth is likely to recover to 32.3% in FY13 after a fall
of 17.2% in FY12. This recovery is likely to be led by robust sales
volume growth in diesel vehicles on account of a healthy order book,
and supply of diesel engines from Fiat Automobiles India. This growth
may get further impetus with two product launches by Feb12. We
estimate a Dec12 fair value of INR1,217 after applying a P/E of 12.5x,
which is at a 20% discount to the five‐year mean P/E. This discount
factors in the lower earnings growth over FY12f‐FY14f in comparison to
FY07‐FY11. Risk factors are an increase in competition, fuel prices and
interest rates.
Reversion to mean may provide a huge upside
We have arrived at a Dec12 fair value of INR1,217 for MSIL, after applying 12.5x
P/E to our estimates. This fair value would increase to INR1,518 (upside of
58%), if we assume reversion to the five‐year mean P/E of 15.6x. This is likely
on the back of product launches. MSIL has lined up two product launches to aid
sales volume growth: 1) launch of Ertiga MPV in Jan12 ‐ to compete with the
Toyota Innova; and 2) launch of a compact Swift Dzire in Feb12 ‐ to benefit
from lower excise duties on smaller vehicles.
Underperformance led by lower sales volume growth
In 2011, MSIL underperformed the BSE Auto Index and Sensex by 12.7% and
9.2%, respectively. The underperformance was largely driven by lower sales
volume growth. The negative impact on sales volumes was on account of an
increase in competition and production constraints due to labor unrest and
lower production capacity in diesel engines. Market share has reduced to
38.0% in FY12 year‐to‐date, in comparison to 45.5% in the corresponding
period of the previous year.
Worst‐case scenario provides an upside of 16%
In our worst‐case scenario, we assume 9% sales volume growth over FY13f‐
FY14f, in comparison to 12% sales volume growth in the base‐case scenario. In
this scenario we arrive at a Dec12 fair value of INR1,112, which provides an
upside of 16%.
Earnings growth likely to revive from FY13f
As per our estimates, earnings growth is likely to recover to 32.3% in FY13 after
a fall of 17.2% in FY12. This recovery is likely to be led by robust growth in
diesel vehicles on account of a healthy order book, supply of diesel engines
from Fiat Automobiles India.
Dec12 fair value of INR1,217 implies potential upside of 27%
We arrive at a Dec12 fair value of INR1,217 after applying a P/E of 12.5x, which
is at a 20% discount to its five‐year mean. This discount is to factor in lower
earnings growth over FY12‐FY14 in comparison to FY07‐FY11. We do not have a
rating on the stock. Risk factors are an increase in competition, fuel prices and
interest rates.
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