next »

[mehak1]

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.

What's new — Maruti's analyst meet this morning addressed concerns related to cost pressures, capex plans, the revision in the depreciation policy, export plans and the strategic focus on MSIL within the Suzuki group. Management appeared cautious on the near-term outlook, given cost pressures. Management appeared fairly confident about the long-term strategy, (on exports and the domestic market).

Margins could remain under pressure (over the near term) — Rising steel costs and escalating royalty costs are near-term pressure points. Cost reduction initiatives are commencing with Tier 2 vendors (an initiative that would yield structural benefits over the longer term). Pricing action (which should be implemented shortly) will mitigate cost pressures, though management indicated that it did not want to adversely affect demand.

Capital outlay — The Rs65bn capex outlay remains unchanged at present, with ~52% of the capex incurred over FY07/08. Additional capex would be incurred to bolster the distribution and logistics backbone, as also R&D. Our capex assumptions for FY09/10E partially reflect this.

Export strategy — Remains on track: The A-Star will be launched in the
European markets in 4QFY09. Our analysis leads us to believe that the A-Star
could face competition from other models in this segment (Toyota Aygo, VW
Fox, Hyundai i-10). Pricing remains undisclosed – we think it will be in the
range of ~UKP6-6500 (in-line with competing models).

Valuation:

Our target price of Rs807 is based on 9x June 09 cash earnings (CEPS = PAT + depreciation). We believe this is merited, given the slower growth trajectory - both in earnings and cash earnings. We estimate 11.3% and 12% earnings and cash earnings CAGR respectively, vs. our earlier forecasts of 13% and 15% CAGR in EPS / CEPS respectively over the next two years. Maruti has a short trading history compared to its peers in the auto sector. Our multiple of 9x is at a slight discount to the 11.4x trailing two-year average - but merited, given the slower earnings growth trajectory on account of higher competitive intensity, escalating cost pressures, and also the impact of the depreciation policy. Moreover, the macro economic environment is less conducive to growth (interest rates today are higher than the past 3-4 years, which could affect growth across the car industry, given the high proportion of vehicles financed through retail finance). We prefer price/cash earnings as a valuation metric for
the automobile sector, given the relatively high capital intensity (both on capacity and product development) of the business.

Risks:
We rate Maruti Low Risk based on our quantitative risk-rating system, which tracks 260-day historical share price volatility. Risks that could prevent the stock from reaching our target price and rating are: 1) sales of passenger vehicles are sensitive to economic variables with an appreciable rise in interest potentially hitting volume growth across the auto sector; 2) revised emission and safety norms could bring cost pressures; and 3) competitive pressures in
the Indian market continue to increase, which could impact margins over the longer term.

Report card

PE ratio      12.79      13/05/08
EPS (Rs)     60.21       Mar, 08
Sales (Rs crore) 5,564.90   Mar, 08
Face Value (Rs)      5   
Net profit margin (%) 10.29    Mar, 07
Last dividend (%)   100       24/04/08
Return on average equity 22.78    Mar, 07

[mehak1]

Result Update: Q1, 2008-09

At the current market price of Rs 617.90 stock is trading at 10.52x P/E and 2.12x P/BV FY08

HIGHLIGHTS

#The company recorded healthy growth of 21% to Rs 4753.58 crore in quarter ended Jun ’08 backed by its net sales. Driven by 14% growth to 192584 units in its total sales volume in quarter ended Jun ’08. Its domestic sales volume, that contributes 94% to total sales volume, rose by 12% to 180093 units in line with the industry growth. The domestic sales volume was backed by its A2 segment (Alto, Wagon R. Zen, Swift) and A 3 segment (SX4, Swift Dzire). Its exports recorded healthy growth of 38% to 12491 units in quarter ended Jun ’08. Also its income from operations rose by 31% to Rs 22.55 crore.

#Its operating profit margin (OPM) slipped by notable 490 bps to 9.75% owing to the high raw material cost. Its market to market loss amounted to Rs 17.90 crore in quarter ended Jun ’08.

# On the non operating front, its other income surged by robust 47% to Rs 328.78 crore. The other income includes interest/dividend income of Rs 222 crore (up by 41%) from investments in mutual funds and operational activities such as scrap sales of Rs 53.50 crore (up by 55%). Its interest outgo rose by 12% to Rs 16.83 crore. Its depreciation cost surged by 102% to Rs 166.06 crore includes additional depreciation of Rs 61.90 crore owing to the new depreciation policy. The company has adopted new depreciation policy where in which the useful life of the assets under SLM method has been shortened in quarter ended Mar ‘08. The company adopted this new depreciation policy on account of shorter product life cycles due to faster product refreshment and fast changing technology. However its tax provision slipped by 29% to Rs 143.68
crore. Thus the downfall in its net profit was partially arrested to 7% to Rs 465.85 crore.

# Maruti Suzuki posted a 13.5 per cent growth in total sales during the first quarter of 2008-09. Domestic sales grew by 12.1 per cent, led by Swift, Swift DZire and WagonR.

# In the A3 segment (sedans), the Company grew faster than the industry and increased its share in the segment to 26.4 per cent in the first quarter of 2008-09. The Company's A3 segment market share was 21.2 per cent in first quarter of last fiscal.

# The Company exported 12,491 units in the first quarter of 2008-09, against 9,065 units in the first quarter of the previous year, a growth of 37.8 per cent.

# The Company was rated among India's five top companies in the Corporate Reputation Study conducted by TNS Automotive.

Company recently launched a variant in its flagship model Maruti 800 Duo that would run both on liquefied petroleum gas (LPG) as well petrol. The price of Maruti standard LPG variant would cost Rs 2.05 lakh and the AC model would cost Rs 2.26 lakh (ex showroom Delhi). Coinciding with this launch, the company announced that it has sold almost 125,000 cars that are powered by LPG and CNG fuels. Besides the Maruti 800, the company offers Omni and WagonR in dual fuel options (LPG-cum- petrol) As such, Maruti Suzuki is the only manufacturer in the country to offer alternate fuel vehicles across entry level, compact and commercial segments.