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Spark Capital - Maruti Suzuki: Discounts and diesel mix dilution to weigh on near term profitability; Downgrade to Reduce




Spark Capital Advisors(India) Private Limited


19 Sep 2013





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Maruti Suzuki: Discounts and diesel mix dilution to weigh on near term profitability; Downgrade to Reduce We did a channel check with Maruti dealers across a few key states. The feedback is that petrol car enquiries are gradually improving although conversion to sales remains weak. Petrol car volumes are expected to improve towards the festive season and post harvest in rural areas. Despite increasing enquiries we expect discounts to be sticky in petrol cars and continue until a robust demand recovery is in place. While exports, localization and a cyclical demand recovery are long term positives, we see near term risks from rising diesel discounts. Further, a shift to petrol and entry level cars weakens the model mix (FY13 diesel mix at 37.4% going to 30.5% in FY15) diluting realizations and profitability. We cut estimates to factor in INR depreciation and downgrade the stock to Reduce valuing it at 12x FY15E EPS of Rs 110 at a TP of Rs 1,325. Weighted average discounts set to spike: Discounts in Swift diesel and Ertiga diesel were in the range of Rs 15,000 and Rs 20,000 respectively while there were no discounts on the Dzire. All products were readily available. We estimate that these discounts will drive an increase in weighted average discounts of ~Rs 3,000 qoq. If Swift Dzire were also to go under discounts in future, weighted average discounts can read as high as ~Rs 18,000 in our estimation. Small car demand improving, recovery expected post harvest: Most dealers reported an improvement in entry level car enquiries and were confident of a better 2HFY14 for the smaller cars. The entry level hatch-backs have begun to outperform other segments since April 2013 and the reduction in volume erosion of this segment is a key positive for Maruti’s market share. Rural demand commentary remains robust on the back of good monsoons and high water levels in reservoirs which can support rabi crop. Dealers expect sales to improve post cash inflows of the harvest season. Export to remain flat for the year: While exports to non European geographies have remained strong, the fall in exports to Europe have dragged total exports down. This was partly due to regulatory changes which have since been addressed. Further, we expect some pre-buying ahead of the Jan 2014 import duty hike in Europe (to 10% from 6.5%). Ertiga kits exports have been generating quarterly revenues of ~Rs 1bn . This is expected to be augmented by export of Wagon R kits. Given the company’s strategic focus on penetrating the African and Latin American markets we expect export volumes to increase gradually. We factor in flat volumes in FY14 and a 15% growth in FY15. Susceptibility to JPYINR movement remains the key risk to margins: 2QFY14 avg. USDINR is 11% weaker qoq while USDJPY remains flat. We estimate that a 5% depreciation of the INR against JPY can drive a 9% cut in out FY15 earnings. This remains the key risk to our estimates.

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