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Maruti Suzuki (MSIL)
Automobiles
Upgrade to BUY. We upgrade Maruti Suzuki to BUY (from ADD) due to a 10%
correction in the stock price over the past three months and we have changed our
target price to Rs1,225 (from Rs1,240 earlier). We expect Maruti to regain most of its
lost market share in FY2013, driven by an increase in diesel engine capacity, launch of
new models (Ertiga and mini-Dzire) and no significant incremental competition in the
small car segment in FY2013, which will be a key driver of the stock price in our view.
Market share improvement will be key to stock performance
We expect domestic passenger car volumes to grow by 12% yoy in FY2013 (on a low base of
FY2012E). Maruti Suzuki lost 6% market share since March 2011 due to lack of diesel engine
capacity and partly due to strikes at its plants. We expect Maruti Suzuki to regain 5% of its lost
market share in the next 12-15 months, driven by an increase in diesel engine capacity and the
launch of mini Dzire, which is likely to open up a new segment for Maruti.
We expect limited competition for Maruti Suzuki in the small car space in FY2013. Maruti’s mini-
Dzire, Swift and Ertiga will contribute 11% of incremental volume growth for Maruti Suzuki in
FY2013, in our view.
We have estimated diesel model volumes will increase to 320,000 units in FY2013 as we expect
Maruti Suzuki to produce 300,000 units from its own diesel engine plant and source 20,000
engines from Fiat.
We expect EBITDA margins to improve due to cost reduction and a decline in discounts
We believe EBITDA margins will bottom out in 3QFY12 and we expect margins to improve by ~400
bps from 3QFY12 levels, driven by (1) a likely 2% increase in prices in January 2012, (2) 2-3%
reduction in imported raw material content, which is likely to boost EBITDA margins by 100 bps,
(3) reduction in average discounts and selling and distribution expenses as industry volumes
improve and (4) reduction in raw material cost.
We upgrade the stock to BUY (from ADD earlier) after the stock price correction
We have upgraded the stock to BUY (from ADD) after the stock corrected by 10% since our last
update in September 2011. We have reduced our target price slightly to Rs 1,225 (from Rs 1,240
earlier) due to a 1-11% downward revision in our earnings estimate for FY2012 and FY2013. Our
target price is based on 13X multiple on our FY2013E EPS.
Upgrade to BUY
We upgrade the stock to BUY (from ADD) after the stock corrected by 10% since our last
update in September 2011. We believe Maruti Suzuki’s profitability will improve significantly
in FY2013, driven by a sharp improvement in volumes and increase in operating margins.
We revise our target price to Rs 1,225 (from Rs 1,240 earlier) as we have cut our earnings
estimates by 1-11% over FY2012 and FY2013. Our target price is based on 13X multiple on
our FY2013E EPS.
We discuss our assumptions in detail below:
�� We expect domestic passenger car industry volumes to grow by 12% yoy in FY2013 (on a
low base of FY2012E). Maruti Suzuki lost 6% market share since March 2011 due to lack
of diesel engine capacity and partly due to strikes at its plants.
�� We expect Maruti to improve its market share by 5% over the next 12-15 months, driven
by (1) an increase in diesel engine capacity from 20,000/month currently to
25,000/month from January 2012, (2) Maruti’s deal with Fiat India to source 100,000
engines in CY2012, (3) the launch of mini-Dzire in mid-CY2012, which is likely to benefit
Maruti through a reduction in excise duty from 25% to 10%, putting it in competition
with Tata Indigo (the only major competitor at that price point) and (4) our expected
limited incremental competition for Maruti Suzuki in FY2013 as there are no major small
car launches by competitors (except for Renault Pulse and GM Sail, which will be
positioned as premium hatchbacks).
�� We have estimated diesel model volumes will increase to 320,000 units in FY2013 as we
expect Maruti Suzuki to produce 300,000 units from its own diesel engine plant and
source 20,000 engines from Fiat.
�� We also expect the new Ertiga to clock volumes of 2,000/month in FY2013 as we expect
pricing to be very competitive from Maruti Suzuki. Ertiga will compete in both, the
personal and transport segment, with Xylo, Innova, Safari, Tavera and Sumo. We expect
the pricing to be Rs600,000-800,000 for the petrol and diesel models. Ertiga will be
launched with a 1400cc K14 petrol engine and 1300 cc diesel engine which are likely to
be less powerful than those of the Innova and Xylo. Hence we believe Maruti will have to
price the product lower than these models to be competitive in this space.
�� We have estimated volumes of 5,000/month for the mini-Dzire in FY2013 and we have
assumed no growth for the longer Dzire in our forecasts for FY2013 as we expect some
cannibalization from the mini-Dzire. Maruti’s mini-Dzire, Swift and Ertiga will contribute
11% of incremental volume growth for Maruti Suzuki in FY2013E, in our view.
�� We estimate EBITDA margins to bottom out in 3QFY12. The company indicated it would
take a price increase of 2-3% in January 2012 to mitigate the impact of a sharp
appreciation of the JPY versus the INR. We expect EBITDA margins to improve to 8%
levels in 4QFY12, driven by volume improvement and the price increase, (which should
mitigate the adverse impact of currency movements), product mix improvement (increase
in contribution of diesel models) and reduction in material costs.
�� We believe EBITDA margins will improve by 200 bps in FY2013 over 4QFY12 levels for
various reasons: (1) a 2-3% cut in imported raw material content due to Maruti’s
localization program (+100 bps positive impact on margins), (2) we do not estimate any
adverse impact from currency movement from 4QFY12 levels, which is as per our
economist’s forecasts, (3) a reduction in average discounts per vehicle (as we expect
diesel model sales to increase to 25% of total volumes in FY2013 from 20% of total
volumes in FY2012), (4) a slight expected reduction in advertising, selling and distribution
expenses as we expect no major launches in FY2013 and (5) operating leverage benefits
due to volume improvement .
We have revised downwards our earnings forecasts by 11% for FY2012 and by 1% for
FY2013 primarily based on a 3-5% reduction in our volume forecasts and a 20-40 bps
decline in our EBITDA margin assumptions
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki (MSIL)
Automobiles
Upgrade to BUY. We upgrade Maruti Suzuki to BUY (from ADD) due to a 10%
correction in the stock price over the past three months and we have changed our
target price to Rs1,225 (from Rs1,240 earlier). We expect Maruti to regain most of its
lost market share in FY2013, driven by an increase in diesel engine capacity, launch of
new models (Ertiga and mini-Dzire) and no significant incremental competition in the
small car segment in FY2013, which will be a key driver of the stock price in our view.
Market share improvement will be key to stock performance
We expect domestic passenger car volumes to grow by 12% yoy in FY2013 (on a low base of
FY2012E). Maruti Suzuki lost 6% market share since March 2011 due to lack of diesel engine
capacity and partly due to strikes at its plants. We expect Maruti Suzuki to regain 5% of its lost
market share in the next 12-15 months, driven by an increase in diesel engine capacity and the
launch of mini Dzire, which is likely to open up a new segment for Maruti.
We expect limited competition for Maruti Suzuki in the small car space in FY2013. Maruti’s mini-
Dzire, Swift and Ertiga will contribute 11% of incremental volume growth for Maruti Suzuki in
FY2013, in our view.
We have estimated diesel model volumes will increase to 320,000 units in FY2013 as we expect
Maruti Suzuki to produce 300,000 units from its own diesel engine plant and source 20,000
engines from Fiat.
We expect EBITDA margins to improve due to cost reduction and a decline in discounts
We believe EBITDA margins will bottom out in 3QFY12 and we expect margins to improve by ~400
bps from 3QFY12 levels, driven by (1) a likely 2% increase in prices in January 2012, (2) 2-3%
reduction in imported raw material content, which is likely to boost EBITDA margins by 100 bps,
(3) reduction in average discounts and selling and distribution expenses as industry volumes
improve and (4) reduction in raw material cost.
We upgrade the stock to BUY (from ADD earlier) after the stock price correction
We have upgraded the stock to BUY (from ADD) after the stock corrected by 10% since our last
update in September 2011. We have reduced our target price slightly to Rs 1,225 (from Rs 1,240
earlier) due to a 1-11% downward revision in our earnings estimate for FY2012 and FY2013. Our
target price is based on 13X multiple on our FY2013E EPS.
Upgrade to BUY
We upgrade the stock to BUY (from ADD) after the stock corrected by 10% since our last
update in September 2011. We believe Maruti Suzuki’s profitability will improve significantly
in FY2013, driven by a sharp improvement in volumes and increase in operating margins.
We revise our target price to Rs 1,225 (from Rs 1,240 earlier) as we have cut our earnings
estimates by 1-11% over FY2012 and FY2013. Our target price is based on 13X multiple on
our FY2013E EPS.
We discuss our assumptions in detail below:
�� We expect domestic passenger car industry volumes to grow by 12% yoy in FY2013 (on a
low base of FY2012E). Maruti Suzuki lost 6% market share since March 2011 due to lack
of diesel engine capacity and partly due to strikes at its plants.
�� We expect Maruti to improve its market share by 5% over the next 12-15 months, driven
by (1) an increase in diesel engine capacity from 20,000/month currently to
25,000/month from January 2012, (2) Maruti’s deal with Fiat India to source 100,000
engines in CY2012, (3) the launch of mini-Dzire in mid-CY2012, which is likely to benefit
Maruti through a reduction in excise duty from 25% to 10%, putting it in competition
with Tata Indigo (the only major competitor at that price point) and (4) our expected
limited incremental competition for Maruti Suzuki in FY2013 as there are no major small
car launches by competitors (except for Renault Pulse and GM Sail, which will be
positioned as premium hatchbacks).
�� We have estimated diesel model volumes will increase to 320,000 units in FY2013 as we
expect Maruti Suzuki to produce 300,000 units from its own diesel engine plant and
source 20,000 engines from Fiat.
�� We also expect the new Ertiga to clock volumes of 2,000/month in FY2013 as we expect
pricing to be very competitive from Maruti Suzuki. Ertiga will compete in both, the
personal and transport segment, with Xylo, Innova, Safari, Tavera and Sumo. We expect
the pricing to be Rs600,000-800,000 for the petrol and diesel models. Ertiga will be
launched with a 1400cc K14 petrol engine and 1300 cc diesel engine which are likely to
be less powerful than those of the Innova and Xylo. Hence we believe Maruti will have to
price the product lower than these models to be competitive in this space.
�� We have estimated volumes of 5,000/month for the mini-Dzire in FY2013 and we have
assumed no growth for the longer Dzire in our forecasts for FY2013 as we expect some
cannibalization from the mini-Dzire. Maruti’s mini-Dzire, Swift and Ertiga will contribute
11% of incremental volume growth for Maruti Suzuki in FY2013E, in our view.
�� We estimate EBITDA margins to bottom out in 3QFY12. The company indicated it would
take a price increase of 2-3% in January 2012 to mitigate the impact of a sharp
appreciation of the JPY versus the INR. We expect EBITDA margins to improve to 8%
levels in 4QFY12, driven by volume improvement and the price increase, (which should
mitigate the adverse impact of currency movements), product mix improvement (increase
in contribution of diesel models) and reduction in material costs.
�� We believe EBITDA margins will improve by 200 bps in FY2013 over 4QFY12 levels for
various reasons: (1) a 2-3% cut in imported raw material content due to Maruti’s
localization program (+100 bps positive impact on margins), (2) we do not estimate any
adverse impact from currency movement from 4QFY12 levels, which is as per our
economist’s forecasts, (3) a reduction in average discounts per vehicle (as we expect
diesel model sales to increase to 25% of total volumes in FY2013 from 20% of total
volumes in FY2012), (4) a slight expected reduction in advertising, selling and distribution
expenses as we expect no major launches in FY2013 and (5) operating leverage benefits
due to volume improvement .
We have revised downwards our earnings forecasts by 11% for FY2012 and by 1% for
FY2013 primarily based on a 3-5% reduction in our volume forecasts and a 20-40 bps
decline in our EBITDA margin assumptions
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