Maruti Suzuki: Sluggish petrol volumes could limit volume growth :: Kotak Securities PDF link

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Maruti Suzuki (MSIL)
Automobiles
Sluggish petrol volumes could limit volume growth. We believe rising ownership
costs of petrol cars will limit volume growth of Maruti Suzuki as expansion in diesel
engine capacity may not compensate for sluggishness in petrol volumes. We maintain
our SELL rating on the stock as we believe valuations factor a potential increase in diesel
engine capacity, market share gains and 200 bps yoy increase in operating margins
while ignoring sluggish growth in petrol volumes.
Rising taxes and potential increase in fuel prices could put pressure on petrol volumes
Petrol volumes form 78% of Maruti Suzuki’s total volumes ad are likely to form about 69% of
total volumes in FY2013 despite factoring in 60% yoy increase in diesel engine capacity by Maruti
Suzuki. We believe petrol volume growth is likely to remain sluggish in FY2013 due to  (1) 2-3%
increase in vehicle prices after the increase in excise duties in the Union Budget, (2) 2-4% increase
in sales tax in Maharashtra, Kerala and West Bengal (which form ~20% of Maruti Suzuki’s
volumes) and (3) likely increase in petrol prices in May after Parliament passes the budget as
under-recoveries on petrol is Rs6.7/ltr. We forecast a flat yoy growth in petrol volumes and 59%
yoy increase in diesel volumes factoring in full impact of increase in diesel engine capacity in
FY2013E.
We forecast EBITDA margins will rise by 220 bps yoy in FY2013E
We forecast EBITDA margins will improve by 220 bps yoy in FY2013E driven by the following
factors: (1) 90 bps improvement in EBITDA margins due to higher diesel volumes. We reckon diesel
models’ EBITDA margins will be 7% higher than petrol models as discounts on petrol models are 5-
6% of vehicle prices; (2) we expect a 90 bps improvement in EBITDA margins due to 4% qoq
depreciation of JPY versus INR in 4QFY12, which is likely to benefit the company in FY2013E as
company will hedge its direct and indirect exposure at these levels in our view. We assume average
JPY-INR rate of 0.630 in FY2013E and FY2014E (versus 0.655 earlier); (3) we expect a further 40
bps improvement in margins due to localization of imported components. Maruti Suzuki indicated
it would localize 2-3% of net sales of imported components every year.
We maintain our SELL rating on the stock and cut our target price to Rs1,170
 We maintain our SELL rating on the stock as we believe valuations are expensive (14.6X PE on our
consolidated EPS forecast for FY2013E) and the rising cost of ownership of vehicles poses a risk to
volume growth assumptions of Maruti Suzuki. We have revised our earnings estimates downwards
by 5-8% over FY2013-2014 driven by 2-4% cut in our volume growth estimates and 30 bps
downward revision in our EBITDA margin forecasts. We have cut our target price to Rs1,170 (from
Rs1,250 earlier) based on 13X multiple on our FY2013E consolidated earnings forecasts.