Maruti Suzuki India -- Problems galore ::Macquarie Research,

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Maruti Suzuki India
Problems galore
Event
 Oil marketing companies have raised the retail price of petrol by Rs3.14/litre
(~4.5%). Petrol prices have increased by ~40% since April 2010. Higher petrol
prices have negatively affected car sales. Among the auto companies, Maruti
will likely be the most affected, as petrol cars constitute >75% of total sales
volumes. We reiterate our contrarian Underperform rating on MSIL.
Impact
 Car sales hit by rising fuel prices and higher lending rates. Car sales
have declined by 1.2% YoY since April 2011. The key reason has been a
275bp increase in auto lending rates and a 40% rise in petrol prices since
April 10. We estimate that the cost of car ownership has risen by 20%, putting
pressure on consumers, who are already burdened by high inflation. Since the
government is subsidising diesel but not petrol, the price differential between
the two fuels has widened to 57%. As a result, sales of diesel cars are
growing much faster than sales of petrol cars.
 MSIL is most sensitive to the petrol price hike. Among the large OEMs,
MSIL has the largest exposure to the petrol car segment. More than 75% of
MSIL’s sales is from petrol cars; as a result, its sales have fallen by 7% YoY.
M&M and Tata Motors get most of their sales from diesel UVs and cars. Twowheelers
and commercial vehicle sales don’t get affected by petrol prices.
 Maruti’s production has been crippled by workers’ strike. Workers at
Maruti’s Manesar plant have been on strike since 29 August. Since then, the
company has hired temporary workers, and, with the help of vendors, it
resumed partial production at Manesar. On 14 Sept, the strike spread to the
Suzuki Powertrain India (SPIL, Not Listed) plant; hence, supply of diesel
engines and transmissions to MSIL has been disrupted. MSIL plans to close
production at its Gurgaon and Manesar plants on 16 Sept. Plants are to reopen
on Monday, 19 Sep, if the issue gets resolved.
 Will festivities return this year? From our channel checks with the autofinanciers
and car dealers, we understand that the festive season is unlikely to
bring cheers back to the car makers. Today’s petrol price hike and the
potential policy rate hike on 16 Sep may worsen consumer sentiment. And
with the supply disruptions at Maruti, we see significant downside risks to our
and the Street’s growth forecasts.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs1,020.00 based on a DCF methodology.
 Catalyst: Resolution of stand-off between the workers and management.
Action and recommendation
 We remain negative on MSIL due to downside risks to its volume growth. Yen
appreciation may weigh on margins in 2H FY11. Underperform maintained.