Analyst Research Report Snapshot

Title:

Spark Capital: Maruti Suzuki 3QFY13 Results Review: Margin assumptions reset on JPY depreciation; Upgrade to Add

Price:

$46.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

28 Jan 2013

Pages:

5

Type:

AcrobatPDF

Companies referenced:

MRTI.NS

Available for Immediate Download
Summary:

Maruti Suzuki: Margin assumptions reset on JPY depreciation; Upgrade to Add 3QFY13 revenues rose 42% yoy driven by a volume growth of 26% on a low base. EBITDA margins expanded 270bps qoq driven by better utilizations and a favourable product mix. PAT grew 196% yoy and came in at Rs 5.01bn. We revise estimates to reflect the ~15% depreciation of the JPY against USD since November 2012 and factor in 9% plus EBITDA margins from FY14. We expect earnings momentum to be positive going forward on the back of a recovery in domestic demand, better product mix and a status quo on currency. We expect a domestic demand recovery to play out in FY14 and FY15 and believe demand will grow off a low base in the next two years. Accordingly, we factor in a FY11-15 volume CAGR of 5.4% and an earnings CAGR of 12.6%. We have seen 20% plus growth in industry volumes after 2-3 years of weak demand three times since FY01. However, we expect a slower recovery in volumes (15% in FY14 and 13% in FY15) this time considering higher competition and the possibility of a slower pace of growth in real wages. We believe our growth assumptions do not imply a sharp sentiment revival and broad based industry growth. Upsides to our volume assumptions are therefore possible. The recent JPY depreciation (if sustained) can drive an EBITDA margin expansion of ~170bps in our view. The benefit of recent JPY depreciation should start flowing through from 4QFY13 particularly on the unhedged exposure and indirect imports. For 4QFY13, majority of the direct exposure has been hedged at 80-84 JPY/USD. We also expect the merger of Suzuki Powertrain to reflect favorably on margins. Further, an increasing proportion of diesel cars in the product mix and the newly launched Alto800 should enable lower weighted average discounts in our opinion. However, we expect Alto800 to drive higher royalty payments. We expect EBITDA margins of 9.6% and 9.4% in FY14 and FY15 respectively, with JPY appreciation being the key risk. If the yen retraces half of the recent sharp depreciation (i.e. a rally of 7.5%), our FY15 estimates will undergo a downward revision by 13%. Given the susceptibility to currency movements we continue to value the stock at a discount to historical trading multiples. Estimates and Valuations: We expect a revenue CAGR of 13.6% from FY11-15E to Rs 615bn and an EBITDA margin decline of 50bps to 9.4% for the same period. Accordingly, we expect an earnings CAGR of 12.6% to Rs 37.55bn. We roll forward to FY15 and value the stock at 13x FY15 EPS of Rs 130 and arrive at TP of Rs 1,690. We upgrade the stock to Add (earlier Reduce).

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