Maruti -New launches, FX to prop up earnings, multiples :: ICICI Securities PDF link

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New launches, FX to prop up earnings, multiples
• MSIL reported revenues of | 12304 crore vs. our estimate of | 12261
crore (YoY increase of ~18%) led by 16.8% YoY increase in volumes
• EBITDA margins at 12.4% came in ~70 bps higher QoQ but ~25 bps
lower than our estimate of 12.7% owing to higher other expenses
• Higher-than-expected other income at | 193 crore vs. our estimate of
| 123 crore along with lower-than-expected tax rate of ~20%
boosted PAT, which came at in at ~| 863 crore (28.7% YoY higher),
beating our estimate of ~| 781 crore
Market leader to benefit from domestic passenger vehicle up cycle!
A recovery in the overall economy would have a multiplier effect on the
passenger vehicle up cycle, which would benefit MSIL, the largest
carmaker in India. We believe MSIL’s largely petrol denominated small car
portfolio is likely to benefit the most as the industry comes off a lean
patch of about three years with overall volumes growing at merely ~5.6%
CAGR in FY10-14. In the next five years, we expect penetration levels to
increase from current lowly levels of ~15 cars per 1000 and march
towards peer penetration levels (China: ~60/1000, Brazil: ~200/1000).
New launches help withstand competition onslaught, retain market share
MSIL has seen a major challenge to its dominant market share position as
global carmakers launched products aimed to gain market share. MSIL
did lose market share from ~50% to ~40% in the last two or three years.
However, it still stands at an impressive ~44% on the back of its vast
distribution network (~1200 dealerships in ~800 cities) and strong service
network (~3000 workshops in ~1400 cities). Going ahead, with a strong
product pipeline in the next two or three years coupled with further
enhancement of distribution network and production capacity, MSIL is
likely to hold on to market share even as competition further intensifies.
Leverage benefits, lower discounts, forex headwinds to aid margins!
New product launches are likely to aid growth momentum in an
improving market environment. MSIL is likely to benefit with strong
operating leverage benefits likely to accrue as volumes pick-up after
about two years of stagnant growth. With better demand pick-up, we also
expect a gradual reduction in average discounts from current levels of
| 21,000/unit. Another factor that has aided margins in FY13/14 has been
JPY depreciation as well as localisation drive. With direct and vendor
exposure being ~16% of net sales and royalty at current levels of ~6% of
net sales, FX could be a major headwind as JPY continues to weaken
against major currencies. Considering all factors, we have built in ~280
bps increase in margin over FY14-17E.
Preferred “domestic recovery play”; earnings on strong growth wicket
We prefer the four-wheeler auto segment to the two-wheeler segment as
low penetration levels still provide headroom for sustained growth. We
continue to remain bullish on the longer-term growth prospects of the car
segment, especially MSIL. The rationalisation of the diesel-petrol price
gap is also expected to aid MSIL’s petrol-dominated product portfolio.
With major currency headwinds also likely to play out, we believe there is
significant room for multiple re-rating as earnings growth remains strong
(~30% CAGR FY14-17E). Thus, we ascribe a multiple of 18x, ~10%
higher than five-year average multiple. We, thus, value MSIL at 18x FY17E
EPS of ~| 206 (~0.6x PEG CAGR in FY14-17E) to arrive at a target price of
| 3700. We upgrade our recommendation to BUY.

LINK
http://content.icicidirect.com/mailimages/IDirect_MarutiSuzuki_Q2FY15.pdf