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MOSL: MARUTI SUZUKI (Buy) - Gujarat plant terms modified to address concerns




Motilal Oswal Securities Ltd.


18 Mar 2014





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MARUTI SUZUKI: Gujarat plant terms modified to address concerns; Deal favorable for minority shareholders as there is no room for ambiguity (MSIL IN, Mkt Cap USD8.6b; CMP INR1,737; TP INR2,500; 44% Upside, Buy) MSIL reviewed terms of proposed Suzuki Gujarat plant (SG), to fully address concerns raised by the investors. Further, it is voluntarily seeking minority shareholders approval for this arrangement. Post these revisions, we believe focus would return to the fundamentals, which are clearly stabilizing and showing initial signs of improvement with increase in footfalls/ enquiries. MSIL is a clean play on economic recovery in India. Post this clarification, we are reverting valuations for TP to 10x FY16 Cash EPS (implied ~16x FY16 EPS), which we had discounted by 20% due to ambiguity surrounding Gujarat plant. Maintain Buy with TP of ~INR2,500 (16x FY16 EPS or 10x Cash EPS). We rate MSIL as our top-pick in the auto sector. As per revised terms, entire capex would be funded by depreciation and equity contribution by Suzuki Motor (Parent), indicating there wouldnt be any profit retention by SG. Earlier capex funding was also from profit margins for car sold from SG. Effectively, pricing of cars from SG would be at actual cost + depreciation (v/s earlier pricing = cost + depreciation + margins). Also, in case of termination of contract manufacturing arrangement, SG plant would be transferred to MSIL at book value (effectively at cumulative equity infusion by Suzuki), unlike at fair value as determined by independent valuations in the earlier arrangement. We believe these revisions should clarify any doubts about intentions of the parent, and makes us believe that Suzuki would be solely interested in de-risking its Indian manufacturing operations after its experience of Manesar industrial unrest. Valuation & view We believe MSIL has addressed two major investor concerns on the Gujarat plant: Funding for additional capex: The additional capex will be funded only by a combination of depreciation and equity infusion by Suzuki, with no mark-up on car sold to MSIL. Gujarat plant ownership: In the event of non-renewal of the manufacturing arrangement, the assets of the Gujarat subsidiary would be transferred to MSIL at book value (v/s a fair value based on independent valuation). We believe the Gujarat facility arrangement through Suzukis 100% subsidiary is beneficial for MSIL, improving overall profits (with treasury income) and return ratios. Also, accumulated cash can be invested by MSIL to fortify its marketing network and strengthening its R&D. This clarification also makes clear that Suzukis intention is not to profit from this investment directly but through MSIL, given its 56% stake. The impact of the Gujarat facility on MSILs financials would be seen only in FY17. Our preliminary estimates indicate NPV of ~INR340/sh (~19% of CMP) for benefits of this deal accruing to MSIL. The stock trades at 14.9x/11.2x FY15E/16E consolidated EPS of INR116.9/INR155.1.

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