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Maruti Suzuki India
Limited
F1Q12 Results: Beats
Expectations, Remain EW
What's Changed
Price Target Rs1,305.00 to Rs1,264.00
F12e, F13e EPS By -11%/-14%
We like MSIL long-term but expect the stock to
remain range bound in coming quarters. Car
volumes are unlikely to revive in F12 and high
inventory will push discounts up, thus putting
pressure on earnings. We cut our estimates (despite
a good F1Q12) and price target, and remain EW.
Lower volume outlook leads us to cut our EPS
estimates by 11% for FY12 and 14% for FY13: We
bring down our volume assumptions and now expect
overall volumes to grow by 5% for FY12 and 13% for
FY13. Our probability-weighted price target comes down
to Rs1,264, implying 15x FY12e EPS and 8.1x FY12e
EV/EBITDA, close to historical average multiples.
F1Q12 EBITDA of Rs8bn was 11% above our
expectations: The beat came from better mix, low
discounts, favorable currency hedges and drop in royalty.
Revenue growth was 4% YoY but EBITDA was down 5%
YoY. EBITDA margins were 9.5%. Capital gains and
rising rates pushed interest income up and other income
rose 50% QoQ, fueling a 20% beat in PAT.
Key positives: 1) The ASPs expanded 3% QoQ as mix
shifted in favor of diesel cars and discounts came down
10% QoQ. 2) Other expenses as a percentage of sales
fell 70 bps QoQ as royalty charge went down. 3) The
company has 30k bookings for the new Swift.
Key negatives: 1) The macro environment remains
sluggish and inventory is at 4 to 5 weeks versus the
normal level of 3 weeks. 2). Discounts are inching up on
a QoQ basis, and since we expect muted volumes this
year, high discounts will directly hit margins.
Maintain EW Rating: Subdued Volume, Margin Pressure, Fairly Valued
Maruti Suzuki’s top line-growth in F1Q12 was at 4% YoY but
high competition in an inflationary environment compressed
EBITDA margins and EBITDA was down 5% YoY. Given rising
rates (75% of cars are financed in India), a high base, and high
inventory in the system, volume momentum in the coming year
will be subdued. Also, margins are unlikely to expand as
discounts inch up and currency movement is adverse.
At our revised price target, the stock would trade at 15x
F2012e earnings, close to historical valuations… The stock
is close to its historical average multiples now
(one-year-forward P/E of 14x and EV/EBITDA of 7.4x). We
expect Maruti to post an earnings CAGR of 9% over FY11-13.
…but the environment remains adverse:
• We cite both the macro side – inflation, currency and
interest rates…
• …and the micro side – increasing competitive pressures
in the domestic market and slowing exports.
Model changes – overall, we lower earnings by 11% for
FY12 and 14% for FY13:
• We broadly maintain our margin assumptions…
• …but cut our overall volume assumptions to 5% growth in
FY12 vs. 14% earlier. We take into account muted F1Q11
volumes of 3%, high inventory of 4 to 5 weeks vs. an
average level of 2 to 3 weeks, and an inflationary
environment.
Revisiting the “Four C’s” of MSIL: Currency and competition
remain a headwind while commodity prices seem stable and
capacity is not a concern this year.
Competition – focus to shift from launches to discounts:
Competitive launches continue (Exhibit 3); since MSIL has an
interesting lineup of launches, it should be able to maintain
market share in FY12. In the past discounts have not mattered
as much as launches, since high volumes offset some of the
discount headwinds – but this year, since we expect volumes
will be muted, any significant increase in discounts will
compress margins. In F1Q12, MSIL’s average discount was at
Rs9,400, down 10% QoQ. Channel checks indicate that this is
inching up while volumes still remain muted.
Currency is the wild card: Direct and indirect imports make up
20% of MSIL’s net sales. MSIL has hedged its direct exposure
(almost half of overall exposure) at 83/85 USD /JPY. Those
hedges will last for another quarter, helping to keep margins
stable in Q2. Assuming yen exposure at current rate, then from
Q3 onwards, margins could fall by 40-50 bps from current levels.
In an endeavor to lower the business risk of yen exposure,
management plans to increase localization from 79% now
(including vendor imports) to 85% in the next two years
A Detailed Look at First-Quarter Results
Beat our expectations: Revenue and adjusted PAT grew by
4% and 7% YoY in F1Q12. EBITDA margin came in at 9.5%,
above our expectation of 9%, mainly as realisations improved
3% QoQ on an improved product mix. Reported PAT came in
at Rs5.5 bn, up 18% YoY and 24% above our expectations,
mainly as other income increased 50% QoQ.
ASP expansion of 2.9% QoQ: Realization improved 3% QoQ
mainly because the diesel; segment made an increased
contribution as its share went up from 19% in F4Q11 to 21% of
domestic sales in F1Q12. Further discounts (netted in sales)
went down 10% QoQ thus improving ASPs.
EBITDA margin at 9.5%: MSIL reported margins at 9.5% vs
our expectation of 9%, thanks to:
1) Improvement in realization, low-margin exports went
slowly and high margin diesel cars’ share went up.
2) Royalty went down 40 bps QoQ as exports slowed and
currency hedges were favorable.
3) Other expenses were low as advertising costs went down
and lower exports implied lower freight expenses.
Overall (as Exhibit 8) shows the margins were better than we
expected on account of low royalty and drop in S&D expenses.
Other Income jumped 50% QoQ: Other income increased to
Rs1.8bn, up 80% YoY and 50% QoQ. This included a Rs400m
capital gain, which will be recurring in every first quarter of the
financial year. Rising rates also improved the yield on surplus
cash, thus raising other income.
Key Takeaways from Conference Call:
Weak retail sales, rising inventory and muted growth
outlook: Demand outlook remains challenging in FY12 and
the company expects single digit growth in the coming year.
Sales trend: number of first-time buyers increasing: Top
ten cities remain weak but rural demand (20% of volumes) is
holding up well. The share of first-time buyers is going up and
they now form 47% of the market. Second car buyers and
replacement demand form 27% and 25% of overall sales.
Portfolio shifting towards diesel cars: Diesel cars now form
21% of the mix versus 19% in March quarter. In line with rising
demand, the company is raising capacity for diesel cars from
250k units p.a. to 290k units p.a. by end of September 11.
Capex guidance: FY12 at Rs40bn mainly towards capacity
building and R&D, and FY13 at Rs30bn mainly towards new
model launches and R&D. High capex for FY12 implies that the
company will not generate any free cash this year. Cash on
books is at Rs65bn – i.e., Rs220 per share.
Royalty will stay in the range of 5%-5.5% In F1Q12 the
royalty declined 40 bps sequentially to 4.8%. As new launches
start (Swift in Q2) we expect royalty to inch up.
On the new Swift launch expected in August: MSIL guided
toward an order book of 30,000 cars. The company expects
about a 15k-17k monthly run-rate for the new Swift.
Hedged JPY exposure for F2Q12: Management guided that
the company is hedged for JPY exposure till F2Q12 at about 83
USD/JPY, and the exposure remains open in H2F12.
Capacity additions: 250k pa Manesar capacity addition is on
track and the line is expected to start in early F3Q12.
Valuation: Re-examining Our Scenario Values
We base our price target on probability-weighted residual
income values across scenarios. We arrive at a new price
target of Rs1,264, implying 7% upside.
We continue to assume a cost of equity of 12.2% (based on a
beta of 0.7 and a 10-year bond yield of 8% applied to a 6%
market risk premium), earnings growth over F2013-21 of 18%,
and a terminal growth rate of 6%.
Our probability weightings remain unchanged: 70% to our base
case, 20% to our bull case, and 10% to our bear case.
Base Case: Rs1,247 (previous value Rs1,295)
Domestic sales grow 6% in FY12, margins at 9.5%: We
recognize concerns in domestic auto growth and build in
domestic volume growth of 6% in FY12 vs. 3% growth in
F1Q12, but down from 14% growth we assumed previously.
Given slowdown in exports volumes to Europe, we are
projecting flattish growth in exports in FY12. Inflationary
pressures keep margins at 9.5% levels, in line with F1Q12, but
lower than the 9.7% margins levels we had assumed
previously. This leads to our base-case value of Rs1,247 per
share
Bear Case Rs1,010 (previous value Rs967)
Competition makes successful inroads; pricing
pressures: GM, with its pan-Indian presence and aggressive
marketing, gains market share in the Rs300-Rs500k car
segment from MSIL brands like Alto and Wagon R. VW’s Polo,
Toyota’s Etios, Honda’s Brio and Hyundai’s small car gain
market share from the Rs500-650k MSIL’s Swift/Ritz segment.
Overall domestic sales growth slows to 3% in FY12 , versus the
10% growth we had assumed previously. Yen remains at
current levels and slowing volumes weaken MSIL’s position to
raise prices thus EBITDA margins fall to 8.5% in FY12. These
assumptions lead to our bear-case value of Rs1,010 per share.
Bull Case Rs1,448 (previous value Rs1,511)
Domestic demand exceeds our expectation, competition
falters: Domestic demand is stronger than our expectation
(bull case assumes 12% volume growth in FY12 and 15% in
FY13) and competition falters. We bring down our bull case
domestic growth assumption to 12% in FY12, versus 20%
growth previously. Incremental capacity improves mix and the
operating leverage thereon lifts MSIL’s margins in FY12 to 11%,
closer to management’s longer term target of 11 to 12%
EBITDA margins. These assumptions lead to our bull-case
value of Rs1,448 per share.
Exhibit 10
Base Case Residual Income Model
Model Assumptions
Risk free rate (%) 8.00
Long Term Beta (%) 70.00
Risk premium (%) 6.00
COE (%) 12.20
Terminal Growth Rate (%) 6.0
RI Model Snaphot
Beginning Equity Capital (A) 139,613
PV of Forecast Period (B) 22,991
PV of Continuing Value ( C) 63,088
PV For Terminal Value (Rs bn) 95,591
Total 321,283
Intrinsic value (one year forward) 1,247
Current Price 1,178
Upside/(downside) (%) 6
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Maruti Suzuki India
Limited
F1Q12 Results: Beats
Expectations, Remain EW
What's Changed
Price Target Rs1,305.00 to Rs1,264.00
F12e, F13e EPS By -11%/-14%
We like MSIL long-term but expect the stock to
remain range bound in coming quarters. Car
volumes are unlikely to revive in F12 and high
inventory will push discounts up, thus putting
pressure on earnings. We cut our estimates (despite
a good F1Q12) and price target, and remain EW.
Lower volume outlook leads us to cut our EPS
estimates by 11% for FY12 and 14% for FY13: We
bring down our volume assumptions and now expect
overall volumes to grow by 5% for FY12 and 13% for
FY13. Our probability-weighted price target comes down
to Rs1,264, implying 15x FY12e EPS and 8.1x FY12e
EV/EBITDA, close to historical average multiples.
F1Q12 EBITDA of Rs8bn was 11% above our
expectations: The beat came from better mix, low
discounts, favorable currency hedges and drop in royalty.
Revenue growth was 4% YoY but EBITDA was down 5%
YoY. EBITDA margins were 9.5%. Capital gains and
rising rates pushed interest income up and other income
rose 50% QoQ, fueling a 20% beat in PAT.
Key positives: 1) The ASPs expanded 3% QoQ as mix
shifted in favor of diesel cars and discounts came down
10% QoQ. 2) Other expenses as a percentage of sales
fell 70 bps QoQ as royalty charge went down. 3) The
company has 30k bookings for the new Swift.
Key negatives: 1) The macro environment remains
sluggish and inventory is at 4 to 5 weeks versus the
normal level of 3 weeks. 2). Discounts are inching up on
a QoQ basis, and since we expect muted volumes this
year, high discounts will directly hit margins.
Maintain EW Rating: Subdued Volume, Margin Pressure, Fairly Valued
Maruti Suzuki’s top line-growth in F1Q12 was at 4% YoY but
high competition in an inflationary environment compressed
EBITDA margins and EBITDA was down 5% YoY. Given rising
rates (75% of cars are financed in India), a high base, and high
inventory in the system, volume momentum in the coming year
will be subdued. Also, margins are unlikely to expand as
discounts inch up and currency movement is adverse.
At our revised price target, the stock would trade at 15x
F2012e earnings, close to historical valuations… The stock
is close to its historical average multiples now
(one-year-forward P/E of 14x and EV/EBITDA of 7.4x). We
expect Maruti to post an earnings CAGR of 9% over FY11-13.
…but the environment remains adverse:
• We cite both the macro side – inflation, currency and
interest rates…
• …and the micro side – increasing competitive pressures
in the domestic market and slowing exports.
Model changes – overall, we lower earnings by 11% for
FY12 and 14% for FY13:
• We broadly maintain our margin assumptions…
• …but cut our overall volume assumptions to 5% growth in
FY12 vs. 14% earlier. We take into account muted F1Q11
volumes of 3%, high inventory of 4 to 5 weeks vs. an
average level of 2 to 3 weeks, and an inflationary
environment.
Revisiting the “Four C’s” of MSIL: Currency and competition
remain a headwind while commodity prices seem stable and
capacity is not a concern this year.
Competition – focus to shift from launches to discounts:
Competitive launches continue (Exhibit 3); since MSIL has an
interesting lineup of launches, it should be able to maintain
market share in FY12. In the past discounts have not mattered
as much as launches, since high volumes offset some of the
discount headwinds – but this year, since we expect volumes
will be muted, any significant increase in discounts will
compress margins. In F1Q12, MSIL’s average discount was at
Rs9,400, down 10% QoQ. Channel checks indicate that this is
inching up while volumes still remain muted.
Currency is the wild card: Direct and indirect imports make up
20% of MSIL’s net sales. MSIL has hedged its direct exposure
(almost half of overall exposure) at 83/85 USD /JPY. Those
hedges will last for another quarter, helping to keep margins
stable in Q2. Assuming yen exposure at current rate, then from
Q3 onwards, margins could fall by 40-50 bps from current levels.
In an endeavor to lower the business risk of yen exposure,
management plans to increase localization from 79% now
(including vendor imports) to 85% in the next two years
A Detailed Look at First-Quarter Results
Beat our expectations: Revenue and adjusted PAT grew by
4% and 7% YoY in F1Q12. EBITDA margin came in at 9.5%,
above our expectation of 9%, mainly as realisations improved
3% QoQ on an improved product mix. Reported PAT came in
at Rs5.5 bn, up 18% YoY and 24% above our expectations,
mainly as other income increased 50% QoQ.
ASP expansion of 2.9% QoQ: Realization improved 3% QoQ
mainly because the diesel; segment made an increased
contribution as its share went up from 19% in F4Q11 to 21% of
domestic sales in F1Q12. Further discounts (netted in sales)
went down 10% QoQ thus improving ASPs.
EBITDA margin at 9.5%: MSIL reported margins at 9.5% vs
our expectation of 9%, thanks to:
1) Improvement in realization, low-margin exports went
slowly and high margin diesel cars’ share went up.
2) Royalty went down 40 bps QoQ as exports slowed and
currency hedges were favorable.
3) Other expenses were low as advertising costs went down
and lower exports implied lower freight expenses.
Overall (as Exhibit 8) shows the margins were better than we
expected on account of low royalty and drop in S&D expenses.
Other Income jumped 50% QoQ: Other income increased to
Rs1.8bn, up 80% YoY and 50% QoQ. This included a Rs400m
capital gain, which will be recurring in every first quarter of the
financial year. Rising rates also improved the yield on surplus
cash, thus raising other income.
Key Takeaways from Conference Call:
Weak retail sales, rising inventory and muted growth
outlook: Demand outlook remains challenging in FY12 and
the company expects single digit growth in the coming year.
Sales trend: number of first-time buyers increasing: Top
ten cities remain weak but rural demand (20% of volumes) is
holding up well. The share of first-time buyers is going up and
they now form 47% of the market. Second car buyers and
replacement demand form 27% and 25% of overall sales.
Portfolio shifting towards diesel cars: Diesel cars now form
21% of the mix versus 19% in March quarter. In line with rising
demand, the company is raising capacity for diesel cars from
250k units p.a. to 290k units p.a. by end of September 11.
Capex guidance: FY12 at Rs40bn mainly towards capacity
building and R&D, and FY13 at Rs30bn mainly towards new
model launches and R&D. High capex for FY12 implies that the
company will not generate any free cash this year. Cash on
books is at Rs65bn – i.e., Rs220 per share.
Royalty will stay in the range of 5%-5.5% In F1Q12 the
royalty declined 40 bps sequentially to 4.8%. As new launches
start (Swift in Q2) we expect royalty to inch up.
On the new Swift launch expected in August: MSIL guided
toward an order book of 30,000 cars. The company expects
about a 15k-17k monthly run-rate for the new Swift.
Hedged JPY exposure for F2Q12: Management guided that
the company is hedged for JPY exposure till F2Q12 at about 83
USD/JPY, and the exposure remains open in H2F12.
Capacity additions: 250k pa Manesar capacity addition is on
track and the line is expected to start in early F3Q12.
Valuation: Re-examining Our Scenario Values
We base our price target on probability-weighted residual
income values across scenarios. We arrive at a new price
target of Rs1,264, implying 7% upside.
We continue to assume a cost of equity of 12.2% (based on a
beta of 0.7 and a 10-year bond yield of 8% applied to a 6%
market risk premium), earnings growth over F2013-21 of 18%,
and a terminal growth rate of 6%.
Our probability weightings remain unchanged: 70% to our base
case, 20% to our bull case, and 10% to our bear case.
Base Case: Rs1,247 (previous value Rs1,295)
Domestic sales grow 6% in FY12, margins at 9.5%: We
recognize concerns in domestic auto growth and build in
domestic volume growth of 6% in FY12 vs. 3% growth in
F1Q12, but down from 14% growth we assumed previously.
Given slowdown in exports volumes to Europe, we are
projecting flattish growth in exports in FY12. Inflationary
pressures keep margins at 9.5% levels, in line with F1Q12, but
lower than the 9.7% margins levels we had assumed
previously. This leads to our base-case value of Rs1,247 per
share
Bear Case Rs1,010 (previous value Rs967)
Competition makes successful inroads; pricing
pressures: GM, with its pan-Indian presence and aggressive
marketing, gains market share in the Rs300-Rs500k car
segment from MSIL brands like Alto and Wagon R. VW’s Polo,
Toyota’s Etios, Honda’s Brio and Hyundai’s small car gain
market share from the Rs500-650k MSIL’s Swift/Ritz segment.
Overall domestic sales growth slows to 3% in FY12 , versus the
10% growth we had assumed previously. Yen remains at
current levels and slowing volumes weaken MSIL’s position to
raise prices thus EBITDA margins fall to 8.5% in FY12. These
assumptions lead to our bear-case value of Rs1,010 per share.
Bull Case Rs1,448 (previous value Rs1,511)
Domestic demand exceeds our expectation, competition
falters: Domestic demand is stronger than our expectation
(bull case assumes 12% volume growth in FY12 and 15% in
FY13) and competition falters. We bring down our bull case
domestic growth assumption to 12% in FY12, versus 20%
growth previously. Incremental capacity improves mix and the
operating leverage thereon lifts MSIL’s margins in FY12 to 11%,
closer to management’s longer term target of 11 to 12%
EBITDA margins. These assumptions lead to our bull-case
value of Rs1,448 per share.
Exhibit 10
Base Case Residual Income Model
Model Assumptions
Risk free rate (%) 8.00
Long Term Beta (%) 70.00
Risk premium (%) 6.00
COE (%) 12.20
Terminal Growth Rate (%) 6.0
RI Model Snaphot
Beginning Equity Capital (A) 139,613
PV of Forecast Period (B) 22,991
PV of Continuing Value ( C) 63,088
PV For Terminal Value (Rs bn) 95,591
Total 321,283
Intrinsic value (one year forward) 1,247
Current Price 1,178
Upside/(downside) (%) 6
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