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Spark Capital: Maruti Suzuki 2QFY13 Results Review: Stretched valuations factor in strong demand recovery; Reiterate Reduce




Spark Capital Advisors(India) Private Limited


01 Nov 2012





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Stretched valuations factor in strong demand recovery; Reiterate Reduce 2QFY13 revenues were down 23% qoq driven by 22% qoq drop in volumes. Export realisations rose 48% qoq on the back of CKD kit exports of Ertiga. EBITDA margins declined 117bps qoq to 6.1%. The impact of low production and weaker mix was partially offset by cut in marketing and other overheads. Gross margins declined 220bps qoq. PAT declined 46% qoq to Rs 2.27bn. We factor in a complete recovery of diesel car volumes lost due to the labour unrest in 2HFY13 and expect diesel car volumes of 400,000 units in FY13. The company will ramp-up diesel capacity to 600,000 units in two phases by June 2014. For FY14, we estimate diesel volumes of 500,000 units. Petrol car volumes for Maruti have declined 17.8% YTD, we factor in a decline of 4% in 2HFY13 on the back of the recently launched Alto 800 and management expectations of a better festive season. However, we understand from channel checks that a weak festive season is probable and believe a steeper decline is a key risk. In FY14, we factor in a recovery in petrol car volumes and expect a growth of 11% on the back of company initiatives. We estimate a total volume growth of 6.5% in FY13 and 16.1% in FY14. We expect EBITDA margins to recover to 7.2% in 2HFY13 driven by an increasing diesel car proportion in the product mix and lower weighted average discounts. We estimate a margin expansion of 100bps in FY14 over FY13 on the back of increasing share of diesel vehicles, lower discounts in petrol cars due to a demand recovery, and operating leverage (ceteris paribus on exchange rates). Estimates and Valuations: We believe the prevailing valuations of Maruti Suzuki factor in a revival in volumes and margin expansion going forward. In our view, there are downside risks to volumes in the form of heightened competition and a prolonged weak sentiment in petrol cars. Currency volatility continues be additional cause of concern. We believe these risks necessitate a valuation multiple discount compared to historical trends. We expect a revenue CAGR of 12.5% from FY11-14E to Rs 526bn and an EBITDA margin decline of 190bps to 8.0% for the same period. Accordingly, we expect an earnings CAGR of 4.9% to Rs 26.93bn. We value the stock at 13x FY14E EPS (earlier 12x FY14E EPS) and arrive at a TP of Rs 1,212 (earlier Rs 1,112) and reiterate our Reduce rating. Other Takeaways from Management: (1) Royalty expenses for Alto 800 to start from 3QFY13. Royalty for 2QFY13 came in at 5.4% and included a write-back of Rs 380mn due to an improvement in exchange rates. (2) Inventory in petrol cars currently at 2 to 3 weeks. (3) Price increase of less than 1% taken in October 2012.

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