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Spark Capital: Maruti Suzuki: Competitive pressure & sluggish demand to impact volumes; upside risk to margins exist




Spark Capital Advisors(India) Private Limited


11 Mar 2013





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Maruti Suzuki: Competitive pressure & sluggish demand to impact volumes; upside risk to margins exist Over the past few weeks we have witnessed a spurt in sales promotion activity (read offers and discounts) by passenger car manufacturers. We believe that this indicates weaker than expected demand environment and hence have revised our volume estimates for Maruti Suzuki (MSIL) downwards. Furthermore, MSIL had a one day production halt (9th March) to keep a check on increasing petrol car inventory. Although MSIL has commented that they will not be party to disruptive pricing, we believe that the increased competition would lead to high levels of discounting or lost volumes. On margins we continue to expect a steep improvement on the back of the weakening yen and the merger of Suzuki Power-train. We came across a number of offers by car manufacturers and dealers in the recent past, the heightened activity to push sales is a strong indicator of sluggish demand, lower than manufacturers expectations. A buy one get one free (with conditions applying) offer by a Skoda dealer grabbed lot of attention, making it the first time such an offer was made available. Tata Motors, which has seen its sales tumble, apart from slashing vehicle prices by up to Rs. 50,000 is offering a buyback of its Manza Club Class at 60% of sale price after three years of purchase. On the Nano, a purchase can be made by credit card and payment can be made in 12 interest free installments. Volkswagen, on its Vento is offering customers to pay half the price immediately and the rest after a year. Similarly Ford had a three day program under which buyers would save between Rs. 37,000 to 97,000 on its vehicles. Hyundai, apart from launching a new version of i10 with added features, offered savings up to Rs. 120,000 on its products While, we have not come across Maruti formally announce higher discounts, our interaction with dealers suggest that discounting levels are high and have increased from about a month earlier. For example, discount on Alto 800 is at Rs. 25,000 currently vs. Rs. 15,000 last month, comparable to that of Hyundai Eon at Rs. 20,000. While we reduce our volume assumptions from 1.38mn to 1.27mn in FY14 to factor in high competition and weak demand environment our assumption on margin improvement remains on the back of favorable yen movement and merger of Suzuki Power-train. We expect a revenue CAGR of 16.6% from FY12-15E to Rs 563bn and an EBITDA margin improvement of 320bps to 10.2% for the same period. Accordingly, we expect an earnings CAGR of 32.8% to Rs 37.0bn. We value the stock at 13x FY15 EPS of Rs 122.5 and arrive at TP of Rs 1,590. We believe there is upside risk to our margin assumptions if JPY continues to decline (USDJPY at 95 vs.78 in 2QFY13; exposure of 27% to sales of which 10% is hedged). However, we currently prefer to remain conservative on the benefits arising from a declining JPY.

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