Maruti, Valuation re-rating precedes earnings uptick! :: ICICI Securities, report

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Valuation re-rating precedes earnings uptick! • MSIL reported revenues of ~| 12,576 crore vs. our estimate of | 12,336 crore (up ~15% YoY) led by 12.4% YoY increase in volumes • EBITDA margins at 12.7% came in ~23 bps higher YoY, lower than our estimate of 13.6% owing to one-off other expenses (| 70 crore), higher than usual advertisement spends (~| 80 crore) • Lower-than-expected other income coupled with above stated factors pushed PAT down to ~| 802 crore (17.8% YoY higher) 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 ~45% 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 led by “S-Cross” coupled with further enhancement of distribution network & production capacity, MSIL is likely to hold on to market share even as competition intensifies. Leverage benefits, reducing discounts, forex to aid margin expansion! MSIL is likely to benefit with strong operating leverage benefits likely to accrue as volumes pick up after about two years of stagnant growth. Utilisations could rise to ~96% in FY16E. The Gurgaon plant would be a depreciated asset by then. With better demand pick-up, we also expect a reduction in average discounts from H2FE16E onwards to ~| 18,000- 19,000/unit levels. Another factor that has aided margins 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 ~5.5- 6% of net sales, forex could still be a significant lever as JPY continues to weaken against major currencies. Considering all factors, we have built in ~320 bps increase in margin over FY14-17E. Preferred “domestic recovery play”; earnings on strong growth wicket We prefer 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 longer-term growth prospects of the car segment, especially MSIL, considering its dominant market share at ~45%. Rationalisation of the diesel-petrol price gap is also expected to aid MSIL’s petrol-dominated product portfolio. Currency also continues to aid MSIL. Thus, all these positives led multiples to scale life-time high levels. We believe earnings growth trajectory would be strong (~30% CAGR in FY14-17E). Thus, we ascribe a multiple of 20x close to its upcycle high multiples as we feel it remains fair under present scenario. We, thus, (~0.6x PEG CAGR in FY14-17E) arrive at a target price of | 4000. However, we downgrade the stock to HOLD awaiting a better entry point.

LINK
http://content.icicidirect.com/mailimages/IDirect_MarutiSuzuki_Q3FY15.pdf