Await a better entry point
We initiate coverage on MSIL with a HOLD rating and TP of Rs 1,350 (13.5x one-year forward earnings). We believe FY13 could be a tough year for the company due to the weak demand environment coupled with production losses following an extended shutdown at its Manesar plant. Further, with 25-28% of sales exposed to the Yen, concerns over currency volatility remain. While FY14 could see a demand recovery off a low base, we are cautious on the stock near term and await a better entry point.
FY13 a tough year: In recent months MSIL has been hit by labour unrest at its Manesar plant coupled with the economic slowdown, both of which dented volumes (-4% in FY13 YTD). We have built in production losses from the Manesar plant shutdown and accordingly expect 6% volume growth in FY13. But with a favourable base and new launches (Ertiga, new Alto), we expect volumes to grow 16% in FY14.
Diesel capacity, SPIL merger to boost product mix: With diesel capacity expansion, we believe the attendant shift in product mix will lead to higher volumes and margins. MSIL has already seen the share of diesel models increase to 38% of sales in Q1FY13 from 20% in Q1FY12. The SPIL merger is also likely to be earnings accretive as it offers opportunities for common sourcing of raw materials and increased localisation.
Volatile currency hurts margins: With 25-28% of sales exposed to the Yen, currency fluctuation has a material impact on profitability. A 1% move in the Yen impacts MSIL’s earnings by 3-4%. Currency volatility thus remains a key risk to margins.
Initiate with HOLD: We expect a revenue/earnings CAGR of 20%/35% over FY12-FY14 and value the stock on 13.5x one-year forward EPS (standalone FY14 EPS of Rs 92 + SPIL EPS of Rs 6.9). This translates to a TP of Rs 1,350 (upside of 11%). We remain cautious on the stock given the cyclical slowdown and await a better entry point. Key risks are adverse movement in currency and delay in demand recovery
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