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Spark Capital: Maruti Suzuki 4QFY13 result review - Strong margin tailwinds in place; Maintain Add




Spark Capital Advisors(India) Private Limited


29 Apr 2013





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Maruti Suzuki: Strong margin tailwinds in place; Maintain Add. Revenues (ex-SPIL) in 4QFY13 rose 9% yoy while margins (ex-SPIL) expanded 240bps qoq driven by favourable exchange rates (60bps), price increases (100bps), and cost reductions (80bps). Like to like earnings grew 80% yoy and came in at Rs 11.5bn driven by EBITDA margin expansion and lower tax rates. While our revenue and volume assumption remain unchanged, we revise margin estimates upwards to incorporate the effect of SPIL merger and JPY depreciation. We expect margins to improve further in the coming quarters. Maintain Add. We expect the volume momentum to remain weak while JPY led margin expansion continue to drive earnings. Weighted average discounts were at the lowest levels in the last seven quarters. Management commentary however indicated that discount levels on individual models remain elevated while the reduction in discounts during the quarter was largely driven by product mix. Accordingly, we expect continued weakness in entry level cars to allow a volume growth of 6% in FY14 and a demand recovery to enable volume growth of ~13% in FY15. In our view, average discounts will remain at these levels (~Rs 10,000 per unit) going forward. We believe EBITDA margins will expand going forward driven by the JPY depreciation. The SPIL merger which was effected during the quarter is expected to drive a margin expansion of 160bps from the 10% reported ex-SPIL (adjusted for MTM gain on royalty). We expect an additional 140bps due to favourable exchange rates. The company realized a rate of 90 JPY per USD on direct imports (8% of sales), while the impact of indirect imports will flow through with a quarter’s lag in 1QFY14. Although, a 13% currency benefit on 8% of sales translates into 100 bps of margin impact, the benefit was lower by 40 bps on account of hedging losses. The company has currently hedged 30% of its total FY14 exposure at an average of 95 JPY per USD, and has placed orders to hedge a higher proportion at better rates. While the 140bps we factor in for the JPY depreciation may prove conservative, we prefer to allow for the possibility of a pass-through of JPY depreciation benefits to suppliers and of recurring hedge losses in a falling JPY scenario. Estimates and Valuations: We expect a revenue CAGR of 13% from FY13-15E to Rs 556bn and an EBITDA margin expansion of 340bps to 13% for the same period. Accordingly, we expect an earnings CAGR of 39% to Rs 46bn. We believe the stock should trade at a discount to historical multiples as the earnings momentum largely hinges on the JPY movement. A 10% movement in the USDJPY from current levels can drive a 14% swing to our earnings estimates (see table on Slide 3). We value the stock at 12x FY15E EPS of Rs 153.8 at a TP of Rs 1,846 and maintain an Add rating.

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