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Maruti Suzuki India (MRTI.BO)
1QFY12: Healthy Beat, But What about the Macro?
1QFY12 PAT of Rs5.5bn — Increase of 7% YoY, far above our expectations of cRs4bn.
The beat was driven by EBITDA margins contracting a mere 60 bps Q/Q (est: 6.5%). The
variance was attributed to a) lower SGA (10% of revenues, 140bps lower than est) due to
lower expenses like warranty provisioning / transportation, et al. Importantly, domestic
ASPs also rose 3% Q/Q, reflecting a) increased mix shift to diesel vehicles (21% of vols
v/s 19% in 4Q11), and b) lower discounts Q/Q (we estimate savings of ~Rs1,000 / car).
Con call takeaways — 1) Challenging macro environment and further demand
deterioration is the biggest concern, and outweighs competition related risks at this
juncture. 2) From a consumer sentiment perspective, growth in footfall is similar to last
year, implying conversion ratios have plummeted (very similar to trends witnessed in
retailers like Shoppers Stop). 3) Demand slow-down is broad-based; rural India growth
rates appear to have declined as well, as rural India’s proportion in overall sales
remains fairly steady at ~20%.
Outlook: More risks than positives — 1) Volumes – mgmt expects a recovery into
the festive season, but we reckon this is based on trends witnessed in the past, rather
than current trends – we note that despite a planned shutdown and a production strike,
dealer inventory increased by ~1 week last Q to ~5 weeks. 2) Margins – an
appreciating yen will impact 2H results as exposures were hedged till end 1HFY12, but
will be mitigated to a certain extent by euro appreciation. Higher diesel volumes could
also mitigate margin pressures, to a certain extent. That said, discounts will likely tick
up sharply into 2Q, given sluggish demand and an inventory build-up.
Given the macro, we maintain Hold: Cut TP to Rs 1,297 — After five consecutive Qs
of earnings downgrades, we reckon that most of the downgrades are factored in. But as
the RBI enters into the last phase of the rate tightening cycle, demand could continue to
be impacted by a lagged effect, raising the specter of earnings downgrades for 1-2 more
Qs. We cut EPS estimates by 10-14% for FY12/13, given deteriorating vol outlook. We
revised our TP to Rs1,297 as we roll forward to Mar13 (from Mar12), and cut our target
multiple to 9x CEPS (10x earlier).
1QFY12 Results: Conference Call Takeaways
1) Product mix shift more evident as diesel-petrol price gap widens — Higher
ASPs in 1QFY12 indicated increased proportion of diesel vehicles in overall
volumes- driven by a widening gap between petrol (post deregulation) and diesel
prices. Per mgmt, diesel vehicles contributed ~21% of overall domestic volumes in
1QFY12 (compared to 19% in 4QFY11). In the wake of the stronger demand, mgmt
has planned to increased diesel engine production capacity from the current
250,000 to 290,000. Mgmt also noted ~50% increase in CNG-vehicle volumes since
petrol price deregulation. Historically, volume rebounds after a fuel price hike occurs
with a lag of 4-8 weeks, per mgmt. However, with the recent petrol price hikes
higher in absolute terms as well as frequency, the volume rebound lag is expected
to be longer. That said, with ~30,000 bookings for the new Swift, mgmt expressed
optimism on demand for its new model line-up. Also, demand in rural sector remains
a steady 20% of overall volumes.
2) Adverse macro conditions the biggest concern — Despite a significant loss in
market share and a slew of new product launches by competitors, mgmt expressed
greater concerns on sluggish overall demand for the industry rather than
competitive intensity. Continued fuel price hikes and rising interest rates are
expected to dampen domestic demand (impact partly mitigated by festive season),
resulting in volume loss as well as am impact on profitability, as discounts are likely
to increase in 2Q (1QFY12 discounts were Rs1,200 higher YoY, but per our
estimates declined ~Rs1000 Q/Q). Mgmt noted that there could be adverse impact
of forex fluctuations (predominantly JPY / INR) from 3QFY12 onwards (JPY
exposure was hedged for 1HFY12). Mgmt noted that it will endeavor to reduce
indirect (vendor) exposure to imports by 200-300bps / year from the current levels
of ~15% of net sales. A silver lining exists in the form of a benign commodity cost
environment as mgmt believes that raw material cost pressures would be less in 2Q
as compared to 1Q.
4) Capex guidance remains strong — Mgmt guided to Rs40bn capex for FY12.
FY13 capex guidance is slightly elevated at Rs30bn. The company is ramping up
Swift production capacity at Manesar and expects production volumes of 15,000-
17,000 units /month for the new Swift. For 1QFY12, finished vehicle inventory was
slightly elevated at 4-5 weeks (compared to an average of 3-4 weeks) - counter
intuitive in the backdrop of decline in dispatches (15-16k units) due to the workers'
strike at Manesar.
5) Focus on cost reduction instead of price hikes — Despite a loss in production
volumes due to the Manesar strike, exacerbated by an overall subdued demand,
MSIL's 1QFY12 SG&A declined ~21% QoQ. Mgmt attributed this to cost-reduction
initiatives undertaken to counter impact of macro conditions on margins. Product
mix shift also resulted in a lower royalty expense of 4.8% of net sales (5.2% in
4QFY11) -- mgmt said that this would continue to be range-bound in the 5-5.5%
region. While 1Q ASPs were partly buoyed by price hike undertaken by MSIL in
April 2011, mgmt said that focus would be more on cost reduction (rather than price
increase) to drive profitability.
Maruti Suzuki India
Company description
Maruti is a subsidiary of Suzuki Motor Corp (holds a 54% equity stake). With its
early-mover advantage in the Indian market, Maruti is a dominant player in the
domestic passenger car market with a c.50% market share. It is re-positioning itself
to become a global production hub of Suzuki over the medium term.
Investment strategy
We rate Maruti shares Hold. Over FY12-13E, we expect the Indian car market to
grow at 10-17% respectively, driven by a) low penetration levels, b) resumption of
financing, and c) a decline of c10% in the overall cost of ownership. Maruti is best
positioned to benefit from this growth, in our view, given its dominance in the
domestic car market. The introduction of new models and a lower total cost of
ownership, combined with a wide sales and service network has helped the
company regain some of the market share it had lost to competition. Geographic
mix shift in export markets should buffer MSIL from Euro realisation volatility. We
estimate Earnings and Cash Earnings CAGR at 6% and 10% respectively over
FY11-13E.
Valuation
Our target price for Maruti of Rs1,297 is based on Sum-of-Parts methodology. We
value the parent business at Rs1,241 based on 9x March FY13E cash earnings
(CEPS = PAT + depreciation). At 9x (earlier 10x) we value the parent business at
slight discount with its historical average. We have cut it from 10x to 9x to reflect
escalating competitive pressures, commodity cost pressure, foreign currency
exposure and our concerns on the changing contours of the relationship between
Suzuki Motors and Maruti Suzuki. We value MSIL's subsidiaries at Rs56/share,
based on 14x March FY13E EPS. We estimate cash earnings CAGR of ~10% over
FY11-FY13E. On our target multiple, Maruti would trade at FY12 E P/E (including
subsidiary earnings) of around 15x (slightly higher than the broad market at ~14x).
We prefer price/cash earnings as a valuation metric for the automobile sector, given
the industry's high capital intensity (both in terms of capacity and product
development). Moreover, MSIL's depreciation policy is per IFRS standards, and is
thus more aggressive than those of peers.
Risks
We rate Maruti Low Risk. This is in line with the Low Risk suggested by our
quantitative risk-rating system, which tracks 260-day historical share price volatility,
and we believe warranted by improving macro trends for the auto sector, in our
view. Upside risks that could prevent the stock from reaching our target price
include: 1) greater than forecast increase in volumes and realizations; and 2)
decline in competitive intensity. Downside risks include: 1) sales of passenger
vehicles are sensitive to economic variables with an appreciable rise in interest
rates potentially hitting volume growth across the auto sector; 2) higher than
forecast increase in commodity costs; 3) competitive pressures in the Indian market
continue to increase, which could impact margins over the longer term; 4)
unfavorable foreign currency rates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki India (MRTI.BO)
1QFY12: Healthy Beat, But What about the Macro?
1QFY12 PAT of Rs5.5bn — Increase of 7% YoY, far above our expectations of cRs4bn.
The beat was driven by EBITDA margins contracting a mere 60 bps Q/Q (est: 6.5%). The
variance was attributed to a) lower SGA (10% of revenues, 140bps lower than est) due to
lower expenses like warranty provisioning / transportation, et al. Importantly, domestic
ASPs also rose 3% Q/Q, reflecting a) increased mix shift to diesel vehicles (21% of vols
v/s 19% in 4Q11), and b) lower discounts Q/Q (we estimate savings of ~Rs1,000 / car).
Con call takeaways — 1) Challenging macro environment and further demand
deterioration is the biggest concern, and outweighs competition related risks at this
juncture. 2) From a consumer sentiment perspective, growth in footfall is similar to last
year, implying conversion ratios have plummeted (very similar to trends witnessed in
retailers like Shoppers Stop). 3) Demand slow-down is broad-based; rural India growth
rates appear to have declined as well, as rural India’s proportion in overall sales
remains fairly steady at ~20%.
Outlook: More risks than positives — 1) Volumes – mgmt expects a recovery into
the festive season, but we reckon this is based on trends witnessed in the past, rather
than current trends – we note that despite a planned shutdown and a production strike,
dealer inventory increased by ~1 week last Q to ~5 weeks. 2) Margins – an
appreciating yen will impact 2H results as exposures were hedged till end 1HFY12, but
will be mitigated to a certain extent by euro appreciation. Higher diesel volumes could
also mitigate margin pressures, to a certain extent. That said, discounts will likely tick
up sharply into 2Q, given sluggish demand and an inventory build-up.
Given the macro, we maintain Hold: Cut TP to Rs 1,297 — After five consecutive Qs
of earnings downgrades, we reckon that most of the downgrades are factored in. But as
the RBI enters into the last phase of the rate tightening cycle, demand could continue to
be impacted by a lagged effect, raising the specter of earnings downgrades for 1-2 more
Qs. We cut EPS estimates by 10-14% for FY12/13, given deteriorating vol outlook. We
revised our TP to Rs1,297 as we roll forward to Mar13 (from Mar12), and cut our target
multiple to 9x CEPS (10x earlier).
1QFY12 Results: Conference Call Takeaways
1) Product mix shift more evident as diesel-petrol price gap widens — Higher
ASPs in 1QFY12 indicated increased proportion of diesel vehicles in overall
volumes- driven by a widening gap between petrol (post deregulation) and diesel
prices. Per mgmt, diesel vehicles contributed ~21% of overall domestic volumes in
1QFY12 (compared to 19% in 4QFY11). In the wake of the stronger demand, mgmt
has planned to increased diesel engine production capacity from the current
250,000 to 290,000. Mgmt also noted ~50% increase in CNG-vehicle volumes since
petrol price deregulation. Historically, volume rebounds after a fuel price hike occurs
with a lag of 4-8 weeks, per mgmt. However, with the recent petrol price hikes
higher in absolute terms as well as frequency, the volume rebound lag is expected
to be longer. That said, with ~30,000 bookings for the new Swift, mgmt expressed
optimism on demand for its new model line-up. Also, demand in rural sector remains
a steady 20% of overall volumes.
2) Adverse macro conditions the biggest concern — Despite a significant loss in
market share and a slew of new product launches by competitors, mgmt expressed
greater concerns on sluggish overall demand for the industry rather than
competitive intensity. Continued fuel price hikes and rising interest rates are
expected to dampen domestic demand (impact partly mitigated by festive season),
resulting in volume loss as well as am impact on profitability, as discounts are likely
to increase in 2Q (1QFY12 discounts were Rs1,200 higher YoY, but per our
estimates declined ~Rs1000 Q/Q). Mgmt noted that there could be adverse impact
of forex fluctuations (predominantly JPY / INR) from 3QFY12 onwards (JPY
exposure was hedged for 1HFY12). Mgmt noted that it will endeavor to reduce
indirect (vendor) exposure to imports by 200-300bps / year from the current levels
of ~15% of net sales. A silver lining exists in the form of a benign commodity cost
environment as mgmt believes that raw material cost pressures would be less in 2Q
as compared to 1Q.
4) Capex guidance remains strong — Mgmt guided to Rs40bn capex for FY12.
FY13 capex guidance is slightly elevated at Rs30bn. The company is ramping up
Swift production capacity at Manesar and expects production volumes of 15,000-
17,000 units /month for the new Swift. For 1QFY12, finished vehicle inventory was
slightly elevated at 4-5 weeks (compared to an average of 3-4 weeks) - counter
intuitive in the backdrop of decline in dispatches (15-16k units) due to the workers'
strike at Manesar.
5) Focus on cost reduction instead of price hikes — Despite a loss in production
volumes due to the Manesar strike, exacerbated by an overall subdued demand,
MSIL's 1QFY12 SG&A declined ~21% QoQ. Mgmt attributed this to cost-reduction
initiatives undertaken to counter impact of macro conditions on margins. Product
mix shift also resulted in a lower royalty expense of 4.8% of net sales (5.2% in
4QFY11) -- mgmt said that this would continue to be range-bound in the 5-5.5%
region. While 1Q ASPs were partly buoyed by price hike undertaken by MSIL in
April 2011, mgmt said that focus would be more on cost reduction (rather than price
increase) to drive profitability.
Maruti Suzuki India
Company description
Maruti is a subsidiary of Suzuki Motor Corp (holds a 54% equity stake). With its
early-mover advantage in the Indian market, Maruti is a dominant player in the
domestic passenger car market with a c.50% market share. It is re-positioning itself
to become a global production hub of Suzuki over the medium term.
Investment strategy
We rate Maruti shares Hold. Over FY12-13E, we expect the Indian car market to
grow at 10-17% respectively, driven by a) low penetration levels, b) resumption of
financing, and c) a decline of c10% in the overall cost of ownership. Maruti is best
positioned to benefit from this growth, in our view, given its dominance in the
domestic car market. The introduction of new models and a lower total cost of
ownership, combined with a wide sales and service network has helped the
company regain some of the market share it had lost to competition. Geographic
mix shift in export markets should buffer MSIL from Euro realisation volatility. We
estimate Earnings and Cash Earnings CAGR at 6% and 10% respectively over
FY11-13E.
Valuation
Our target price for Maruti of Rs1,297 is based on Sum-of-Parts methodology. We
value the parent business at Rs1,241 based on 9x March FY13E cash earnings
(CEPS = PAT + depreciation). At 9x (earlier 10x) we value the parent business at
slight discount with its historical average. We have cut it from 10x to 9x to reflect
escalating competitive pressures, commodity cost pressure, foreign currency
exposure and our concerns on the changing contours of the relationship between
Suzuki Motors and Maruti Suzuki. We value MSIL's subsidiaries at Rs56/share,
based on 14x March FY13E EPS. We estimate cash earnings CAGR of ~10% over
FY11-FY13E. On our target multiple, Maruti would trade at FY12 E P/E (including
subsidiary earnings) of around 15x (slightly higher than the broad market at ~14x).
We prefer price/cash earnings as a valuation metric for the automobile sector, given
the industry's high capital intensity (both in terms of capacity and product
development). Moreover, MSIL's depreciation policy is per IFRS standards, and is
thus more aggressive than those of peers.
Risks
We rate Maruti Low Risk. This is in line with the Low Risk suggested by our
quantitative risk-rating system, which tracks 260-day historical share price volatility,
and we believe warranted by improving macro trends for the auto sector, in our
view. Upside risks that could prevent the stock from reaching our target price
include: 1) greater than forecast increase in volumes and realizations; and 2)
decline in competitive intensity. Downside risks include: 1) sales of passenger
vehicles are sensitive to economic variables with an appreciable rise in interest
rates potentially hitting volume growth across the auto sector; 2) higher than
forecast increase in commodity costs; 3) competitive pressures in the Indian market
continue to increase, which could impact margins over the longer term; 4)
unfavorable foreign currency rates
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