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�� Action
We maintain our REDUCE rating on MSIL with an increased PT of INR1,418,
representing 9% downside. We note our view that the company will face pressures
from: 1) Toyota’s small car launch, Etios; and 2) JPY appreciation in the near term.
The market has already factored in strong growth in volumes but is not pricing in
the risks the company will face in future. MSIL remains a Conviction REDUCE.
�� Catalysts
Increased new competition from Toyota, Honda and Hyundai over the next 18
months and margin pressures from JPY appreciation.
Anchor themes
Car sales in India are expected to grow strongly in FY11F, with Nomura estimating
9% GDP growth in India. However, increased competition will limit the industry’s
pricing power and keep margins low.
Tough times ahead
MSIL shares are up 30% (against 12% for Sensex) since last July,
amid a 5% increase in market multiples, as well as demand that
exceeded our expectations. Still, we believe the market is not pricing
in the market share and margin risks that could follow from the next
quarter. With the launch of Toyota’s Etios in December 2010, we
believe 25% of MSIL’s portfolio will face market-share risks. We have
built in 13% volume growth for MSIL in FY12F, compared with 16%
for the industry. Also, nearly 10% appreciation in JPY could lead to
margins coming off by 80bps from 3Q FY11, we believe.
�� Volume momentum has been stronger than estimated
MSIL has guided that volume momentum is likely to remain strong in
2H FY11. Given this, we have increased our volume estimate for
FY11F from 1.15mn units to 1.25mn units, building in volume growth
of 23% in FY11F, up from our earlier estimate of 14%.
�� Result below estimates at operating level
MSIL declared Adj. Operating profit of INR8.35bn, below our estimate
of INR8.67bn, with Adj. OPM at 9.3% falling short of our estimate of
9.6%. However, higher-than-estimated other income and a lowerthan-
estimated tax rate resulted in Adj. PAT coming in at INR6.2bn,
ahead of our estimate of INR5.9bn.
�� Maintain REDUCE, with revised PT of INR1,418
We have increased our consolidated EPS estimates by 9.7% for
FY11F and 5.6% for FY12F to factor in higher volumes — but we are
7.7% below consensus for FY12F. We value MSIL at 14x average
FY12/13F consolidated EPS of INR101. Our price target of INR1,418
represents 9% downside from current levels.
Margin concerns
JPY appreciation to hit margins from here on
We estimate MSIL has nearly 28% exposure to the JPY, including royalty. MSIL
hedged all of its JPY exposure for 1H FY11. However, it will be hit by 10% JPY
appreciation against the INR in 2H FY11F, we believe. This leads to a margin impact
of 2.8%, on our estimates. To offset, this MSIL has taken the following measures:
1. It is increasing the localisation content – a slow ongoing process
2. It normally hedges the royalty exposure of 5%
3. The company has also been able to hedge 25% of JPY exposure for 2H FY11F
and is taking hedges for FY12F, too
In addition to the above, we think there may be benefits from the proposed India Japan
Comprehensive Economic Partnership Agreement (CEPA) in the future.
In view of the above benefits, we are building in a margin impact of only 80bps from
the Adjusted 2Q FY11 margin of 9.3% from 3Q FY11 onward. Our EBITDA margin
estimate for FY12F now stands at 8.5%, down from 9.1%.
Increasing volume estimate by 8% for FY11F
The car industry SAAR has been pointing to 28% growth for FY11F, well ahead of our
earlier estimate of 20%. Some of MSIL’s products, like the Eeco, have performed
much better than our earlier estimates. MSIL has also been helped by strong growth in
rural markets, which now contribute 19% of sales, compared with 12% in the previous
year. We have therefore increased our volume growth estimate for MSIL from 13.8% to
23.2% for FY11F. Our volume growth estimate for FY12F has been increased from
12.5% to 13% to factor in the stronger performance of the Eeco. Still, we note that in
the case of success for Toyota’s Etios — to be launched in December 2010 — there
could be downside risks to our estimates.
Market share risks from Toyota Etios
We note that the Ritz, Swift and Swift Dzire together contribute about 25% of MSIL’s
volumes. This segment reported volume growth of 25% in 1H FY11. It is also the
higher-realisation, higher-margin segment for MSIL. With the launch of Toyota’s Etios
in December 2010, we believe this segment could face significantly increased market
share pressure and thus pose downside risks to our estimates.
Change in estimates – increasing FY12F estimate by 5.6%
With the change in volume estimates by 8.3% for FY11F, our EPS estimate for FY11F
has gone up by 9.7%. This has also been positively impacted by a lower tax rate
estimate of 29% for FY11F and FY12F, compared with 31% earlier. We have also
improved the yield on other income from 6.5% to 7%, as other income has been ahead
of our estimates.
Increase in price target to INR1,418, with 9% downside
The stock is up by 30% (compared with 12% for Sensex) since 27 July, 2010, driven
by stronger-than-estimated volume growth.
Our new price target is based on 14x average consolidated EPS of FY12/13F
(INR101.3). Our earlier price target was based on 12x FY12F EPS. We have rolled
forward to one-year forward earnings now. We believe that given the stronger volume
growth (changing estimates from 13.8% to 23.2% growth for FY11F) and an increase
in the Sensex (our estimate for the market as a whole) one-year forward P/E multiple
from 15.3x to 16x, the stock will trade at higher multiples.
The average multiple for MSIL over the past five years has been 15x; we are valuing
the company below that multiple to account for:
1. Risks to market share, with the launch of Toyota’s Etios in December 2010 and
other small car launches by Honda and Hyundai by 2012F.
2. Lower margins of 8.5% in FY11F than past levels of around 12%
Key risks
Downside risks
New competition from Toyota and Honda and Hyundai: The launch of Toyota’s small
car, the Etios, will be a significant challenge for MSIL, we believe. In addition, Hyundai
plans to launch its small car in the 800cc engine category by 2012F. This is a segment in
which MSIL faces no competition right now and which contributes nearly 25% of its
volumes.
Increase in steel prices: We have not factored in any increase in steel prices for the
company, as guided by management. In the event of an increase in prices, there
would be downside risk to our estimates.
JPY appreciation against the INR: MSIL imports components worth 20% of net sales
in JPY, on our estimates. Therefore a 5% adverse movement in the JPY would affect
margins by 1%, we believe.
Upside risks
Industry volume growth surprising on the upside in FY12F: We have factored in
16% industry volume growth in FY12F in our estimates, in line with our long-term view.
If volumes were to surprise on the upside, there would be upside risk to our volume
estimates for MSIL too.
Reduction in raw material costs: A sharp decrease in steel prices could lead to
margins coming in higher than our estimates.
GST implementation in FY12F could be positive for the industry: The Indian
government is targeting to implement a goods and services tax (GST) in place of the
multiple tax regimes prevalent currently. Currently, a 10% Excise duty, 12.5% valueadded
tax (VAT) and 2% Central Sales Tax (CST) are levied on cars. These are to be
replaced by a GST, which we think may be around 18-20%. Implementation would
effectively lower car prices by 4% in FY12F, making cars more affordable.
2Q FY11 result – below estimates at operating level
Maruti Suzuki declared Adj PAT of INR6.2bn, against our estimate of INR5.9bn, led by
higher other income. However, operating profit at INR8.35bn was below our estimate
of INR8.67bn, as margins and realisations came in below estimates.
Net sales came in at INR89.8bn, below our estimate of INR90.5bn
Operating profit came in at INR8.35bn, below our estimate of INR8.67bn
OPM came in at 9.3%, below our estimate of 9.6%
Other income came in at INR2.9bn, ahead of our estimate of INR2.4bn
Adj. PAT came in at INR6.22bn, ahead of our estimate of INR5.91bn
RM/Sales came in at 78.3%, better than our estimate of 79.2%
Staff cost/sales was in line at 1.8% of sales
Other expense/sales at 10.6% was ahead of our estimate of 9.4%. Do note that
there was a forex gain of INR750mn in 1Q FY11, which is why other expenses
were lower then.
Note that we have adjusted our numbers for
1. A forex gain of INR100mn reported in other operating income
2. Arrears on raw material costs of INR449mn for 1Q FY11, which were taken in the
current quarter
We believe the company is likely to report volume estimates higher than our earlier
estimates, as management has guided for strong demand momentum. Since the
company is already operating at peak capacity, however, we believe that incremental
volume surprises are unlikely for the next one year. In addition, we expect headwinds
from the Toyota Etios launch. Also, we expect JPY appreciation to hit margins
significantly from 3Q FY11F onward.
Takeaways from the conference call
Volume growth and capacity expansion: The company is witnessing strong demand
momentum. Keeping this in mind, it is looking to bring on capacity of Manesar 2nd
phase by September 2011 and the 3rd phase by FY13F. The total capacity at end-
FY13 is slated to be 1.75mn units. Assuming MSIL can sell 1.75mn units in FY13, this
would imply an 18% volume CAGR over FY11-13F.
Capex: The company would look to undertake capex of INR28bn in FY11F.
Forex hedges: MSIL has hedged 25% of direct imports (approx 10% of sales) and
80% of exports for 2H FY11. It has also started taking some hedges for FY12F.
Vendor imports have not been hedged.
Price increases: There is no plan to increase prices; the mix has stabilised and
therefore top-line growth should be in line with volumes going forward.
Discounts: In 2Q FY11, discounts increased marginally to INR8,500 per unit from
INR8,200/unit in 1Q FY11. Discounts in the festival season are down 18% y-y.
Material costs: Going forward, there will be some increases precious metals and
rubber prices, but steel will remain stable.
Other details:
The company has been rated 1st in the customer satisfaction survey by JD Power for
an 11th consecutive year, increasing the gap over the number two player in the
process.
Rural sales now contribute 19% of sales.
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