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EARNINGS REVIEW
Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
Below expectations – volume growth not translating into earnings
What surprised us
Maruti Suzuki reported 3QFY11 net income of Rs5.65bn, down 17.8% yoy,
5.5% qoq, and 7.6% below our estimate. Sales volume was up 28.2% yoy
and 5.4% qoq. However, EBITDA margin declined by 574bp yoy and 102bp
qoq to 9.7% during the quarter. This decline was mainly driven by higher
royalty payments, higher discounts, adverse foreign exchange movements
on the yen and the euro, and unfavourable product mix, according to the
company.
What to do with the stock
The trend of downward earnings revisions for Maruti Suzuki over the last
few quarters appears consistent with our view of strong volume growth
not translating into earnings growth (see our report, “Maruti Suzuki –
Strong demand may not translate into earnings; Sell on strength,” dated
September 30, 2010). We believe this is due to a structural increase in
competition during 2010, with increasing costs of new technology and
commodity price inflation. We retain our Neutral rating on Maruti Suzuki
and 12-month FY12E P/E-based TP of Rs1,140, because Maruti is trading
close to normalized multiples versus the sector trading on upcycle
valuation, but we remain about 20% below Bloomberg consensus EPS
estimates for FY12 (see our report, “Increasing cyclical risks; downgrading
Hero Honda, M&M to Sell,” dated January 27, 2011).
Key risks to our view: Upside – faster-than-expected ramp-up of new
capacities; downside – higher-than-expected success of new competitors
such as Toyota and Honda
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
Maruti Suzuki India (MRTI.BO)
Neutral Equity Research
Below expectations – volume growth not translating into earnings
What surprised us
Maruti Suzuki reported 3QFY11 net income of Rs5.65bn, down 17.8% yoy,
5.5% qoq, and 7.6% below our estimate. Sales volume was up 28.2% yoy
and 5.4% qoq. However, EBITDA margin declined by 574bp yoy and 102bp
qoq to 9.7% during the quarter. This decline was mainly driven by higher
royalty payments, higher discounts, adverse foreign exchange movements
on the yen and the euro, and unfavourable product mix, according to the
company.
What to do with the stock
The trend of downward earnings revisions for Maruti Suzuki over the last
few quarters appears consistent with our view of strong volume growth
not translating into earnings growth (see our report, “Maruti Suzuki –
Strong demand may not translate into earnings; Sell on strength,” dated
September 30, 2010). We believe this is due to a structural increase in
competition during 2010, with increasing costs of new technology and
commodity price inflation. We retain our Neutral rating on Maruti Suzuki
and 12-month FY12E P/E-based TP of Rs1,140, because Maruti is trading
close to normalized multiples versus the sector trading on upcycle
valuation, but we remain about 20% below Bloomberg consensus EPS
estimates for FY12 (see our report, “Increasing cyclical risks; downgrading
Hero Honda, M&M to Sell,” dated January 27, 2011).
Key risks to our view: Upside – faster-than-expected ramp-up of new
capacities; downside – higher-than-expected success of new competitors
such as Toyota and Honda
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