1. 1QFY2011 Result Update | Automobile
July 26 2010
Maruti Suzuki ACCUMULATE
CMP Rs1,191
Performance Highlights Target Price Rs1,338
Y/E March (Rs cr) 1QFY11 1QFY10 % chg (yoy) Angel Est % Diff Investment Period 12 Months
Net Sales 8,232 6,493 26.8 8,439 (2.5)
S tock Info
Operating Profit 793 793 (0.1) 1,054 (24.8)
S ector Automobile
OPM (%) 9.6 12.2 (259)bp 11 (137)bp
Market Cap (R s cr) 34,412
Reported PAT 465 584 (20.3) 642 (27.5)
Beta 0.8
52 Week High / L ow 1,740/1,171
Maruti Suzuki recorded poor performance for 1QFY2011. Top-line came in
Avg. Daily Volume 133,483
marginally below our estimate largely owing to lower export realization, while
bottom-line was substantially impacted by the extensive contraction in OPM. Face Value (R s ) 5
Higher royalty charges and increase in input costs hit the company’s operating BS E S ens ex 18,020
performance. Nifty 5,419
R euters Code MR TI.BO
Poor performance; 1QFY2011 results substantially below estimates: For
1QFY2011, Maruti registered 27% yoy growth in net sales to Rs8,232cr Bloomberg Code MS IL @IN
(Rs6,493cr), below our expectation. Volumes for the quarter increased 25% yoy,
while realisation grew by a mere 2% for the quarter. EBITDA margins too came in
S hareholding P attern (% )
substantially lower than our expectations owing to higher raw material costs
(increased by 150bp yoy) and substantial increase in royalty (up 230bp yoy) to P romoters 54.2
5.9% of net sales (includes one-time arrears of FY2010 amounting to 0.8% of net MF / Banks / Indian Fls 23.0
sales). Net profit declined to Rs465cr, a dip of 20% yoy and below our FII / NR Is / OCBs 20.2
expectations. Lower export realisation, substantial contraction in EBITDA margins, Indian P ublic / Others 2.6
higher depreciation and lower-than-expected other operating income led to the
significant fall in net profit yoy and qoq.
Abs . (% ) 3m 1yr 3yr
Outlook and Valuation: We revise our estimates downwards to account for higher
S ens ex 1.6 17.2 14.2
royalty payment. We continue to maintain our volume growth estimate for the
company at 13% CAGR aided by ~14% growth in domestic volumes over Maruti S uzuki (10.8) (13.6) 41.6
FY2010-12E. At the CMP, the stock is trading at 12.8x FY2012E earnings. We
downgrade the stock to Accumulate from Buy earlier, owing to lower earnings
CAGR of 3.7% over FY2010-12E vis-as-vis the Sensex CAGR of 17.9%. At our
Target Price of Rs1,338, Maruti would trade at 14.4x FY2012E (15% discount to
our Sensex target multiple).
Key Financials
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net Sales 20,455 29,099 33,710 39,551
% chg 14.3 42.3 15.8 17.3
Net Profit 1,219 2,498 2,302 2,686
% chg (31.4) 104.9 (7.8) 16.7
EBITDA (%) 7.0 11.8 9.7 10.0
EPS (Rs) 37.1 86.4 79.7 92.9
P/E (x) 32.1 13.8 15.0 12.8 Vaishali Jajoo
P/BV (x) 3.7 2.8 2.4 2.0 022-4040 3800 Ext: 344
RoE (%) 15.7 16.5 17.9 15.9 vaishali.jajoo@angeltrade.com
RoCE (%) 7.4 22.3 16.0 16.7
Yaresh Kothari
EV/Sales (x) 1.4 1.0 0.8 0.6
022-4040 3800 Ext: 313
EV/EBITDA (x) 21.8 8.8 8.8 7.0 yareshb.kothari@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
3. Maruti Suzuki | 1QFY2011 Result Update
Net sales marginally below expectation, largely on lower export realisation: For
1QFY2011, Maruti registered 27% yoy growth in net sales to Rs8,232cr
(Rs6,493cr), which was below our expectation. Volumes for the quarter increased
25% yoy, while realisation increased by a mere 2%. Average realisation however,
declined sequentially by 1% largely owing to currency (Euro) impact on export
revenues, which stood at Rs1,130cr (Rs1,283 in 4QFY2010), while average export
realisation declined by almost 8.4% qoq to Rs2.79lakh (Rs3.05lakh in 4QFY2010).
Exhibit 3: Net sales up 27% on 25% volume growth Exhibit 4: Segment-wise market share trend
(Rs cr) (%) (%)
10,000 75 75
62.2 58.2 56.5 58.0
8,000 52.7 53.4
50 50
6,000 44.2 53.5
51.1 50.8 47.6
46.5
31.0
4,000 33.6 26.8 36.9 38.0 37.7
25 35.1 34.6
25
2,000
0 0
0
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Net Sales (LHS) Net Sales Growth (RHS) A2 A3 Total passenger car
Source: Company, Angel Research Source: Company, Angel Research, SIAM
Exhibit 5: Quarterly revenue and realisation performance
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Domestic Revenue (Rs cr) 5,341 5,784 6,020 6,952 6,921
qoq change (%) - 8.3 4.1 15.5 (0.4)
Domestic Realisation (Rs) 270,560 276,616 274,988 283,308 284,934
qoq change (%) - 2.2 (0.6) 3.0 0.6
Export Revenue (Rs cr) 999 1,266 1,314 1,283 1,130
qoq change (%) - 26.7 3.8 (2.4) (11.9)
Export Realisation (Rs) 340,793 341,194 335,924 305,186 279,447
qoq change (%) - 0.1 (1.5) (9.2) (8.4)
Source: Company, Angel Research
Substantial increase in Royalty charges, higher raw material costs impact EBITDA
margins: EBITDA margins came in substantially lower than our expectations owing
to higher raw material costs, which increased by 150bp yoy to 77.9% (76.3%) and
substantial increase in royalty (up 230bp yoy) to 5.9% (3.6%) of net sales (includes
one-time arrears of FY2010 amounting to 0.8% of net sales). Thus, adjusting for
arrears, royalty cost for the quarter stood at 5.1%, which is also significantly higher
and would continue for the rest of the quarters of FY2011. The Royalty charges
spiked due the increase in sales of K-series engine models and amendments in the
various royalty agreements the company has entered with Suzuki Motor
Corporation, resulting in additional Royalty expense of Rs188.7cr (including
Rs65.2cr for the period December 16, 2009 to March 31, 2010).
July 26 2010 3
4. Maruti Suzuki | 1QFY2011 Result Update
Exhibit 6: High Royalty cost hurts EBITDA margins Exhibit 7: Dip in net profits and NPM
(%) (%) (Rs cr) (%)
100 8 750 12
78.2 79.6
77.4 76.2 77.9
80 9.1
6
8.7 7.8 9
5.9
60 3.7 3.6 500 7.7
3.6 3.3
4
40 6
5.6
12.2 12.7 15.1 13.2 2 250
20 9.6
3
0 0
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 0 0
EBITDA Margin Raw Material Cost/Sales 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Royalty Expenses/Sales Net Profit (LHS) Net Profit Margin (RHS)
Source: Company, Angel Research Source: Company, Angel Research
Net profit dips 20%, considerably below estimates: Net profit fell to Rs465cr, a dip
of 20% yoy and below our expectations. Lower export realisation, substantial
contraction in EBITDA margins, higher depreciation and lower-than-expected other
operating income led to the substantial decline in net profit yoy and qoq.
Key highlights
The company, through de-bottlenecking, would be able to manufacture
around 1.1lakh units per month from 2HFY2011E thereby reducing the
uncertainty of capacity constraints to a certain extent.
Management indicated that, Suzuki Corporation (Japan) was earlier being
under-compensated for its R&D efforts and royalty payments were restricted
due to earlier government regulations. Post the new flexible regulations
coming into force recently, the company accordingly increased the Royalty
payment to parent, Suzuki. The increase, according to the company, is
primarily on account of the K-Series petrol engine technology acquired from
Suzuki. Maruti now has K-Series engine capacity of 7.5lakh per annum.
According to the company they are getting advanced technology at a
competitive price.
Euro impact was partly mitigated by hedging gains of 90bp. Maruti has
hedged its Yen and Euro exposure for the next quarter after which the
exchange gains would decline. However, the company plans to increase its
non-Europe exports from 20% of exports in FY2010 to 50% in FY2011E to
partly mitigate the impact of depreciating Euro.
July 26 2010 4
5. Maruti Suzuki | 1QFY2011 Result Update
Exhibit 8: Passenger Vehicles (PV) volume and market share trend
(Units) Market Share (RHS) PV volume (LHS) % yoy growth (RHS) (%)
60
300,000
30
200,000
0
100,000
0 (30)
1QFY07
2QFY07
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
Source: Company, Angel Research, SIAM
Investment Arguments
Per capita near inflexion point for car demand: Car penetration in India is
estimated at around 12 vehicles/1,000 people in FY2009 compared to
around 21 vehicles/1,000 people in China. Moreover, India’s PPP-based per
capita is estimated to approach US $5,000 over the next 4-5 years, which is
expected to be the inflexion point for car demand in the country. Increasing
penetration is estimated to drive around 13% CAGR in domestic volumes over
FY2010-12E. Further, Maruti has a sizeable competitive advantage over the
new foreign entrants, due to its widespread distribution network (service and
sales outlets about 2,767 and 681 respectively), which is not easy to replicate.
Suzuki focusing to make Maruti a small car manufacturing hub: Suzuki Japan
is making Maruti a manufacturing hub to cater to increasing global demand
for small cars, due to rising fuel prices and stricter emission standards. Thus,
we believe that, there exists a huge potential for the company to increase its
market share in the export market. Moreover, R&D capabilities, so far largely
housed at Suzuki Japan, are progressively moving to Maruti. The company is
aiming to achieve full model change capabilities over the next couple of years,
which will enable it to launch new models and variants at a much faster pace,
which should ideally reduce its Royalty payment in the long run (2-3 years).
July 26 2010 5
6. Maruti Suzuki | 1QFY2011 Result Update
Outlook and Valuation
We have revised our estimates downwards to account for the higher royalty
payment. However, we maintain our volume growth estimate at 13% CAGR aided
by ~14% CAGR in domestic volumes over FY2010-12E.
Exhibit 9: Change in estimates
Y/E (March) Earlier Estimates Revised Estimates % chg
FY11E FY12E FY11E FY12E FY11E FY12E
Net Sales (Rs cr) 33,519 39,320 33,710 39,551 0.6 0.6
OPM (%) 11.2 11.3 9.7 10.0 (148)bp (135)bp
EPS (Rs) 92.5 105.3 79.7 92.9 (13.9) (11.7)
Source: Company, Angel Research
At the CMP, the stock is trading at 12.8x FY2012E earnings. We downgrade the
stock to Accumulate from Buy earlier, owing to lower earnings CAGR of 3.7% over
FY2010-12E vis-as-vis the Sensex CAGR of 17.9%. At our target price of Rs1,338,
Maruti would trade at 14.4x FY2012E (15% discount to our Sensex target multiple).
Exhibit 10: Key Assumptions
Particular (units) FY07 FY08 FY09 FY10 FY11E FY12E
A1 : Maruti 800 79,245 69,543 49,383 33,028 29,725 26,753
C: Omni, Versa 83,091 89,737 77,948 101,325 121,590 139,829
A2: Alto, Wagonr, Zen, Swift, A Star 440,375 499,280 511,396 633,190 728,169 822,830
A3 : SX4, Esteem, D-Zire 29,697 49,335 75,928 99,315 114,212 129,060
Total Passenger cars 632,408 707,960 714,655 866,858 993,696 1,118,471
MUV: Gypsy, Vitara 3,221 3,927 7,489 3,932 4,207 4,418
Domestic 635,629 711,824 722,144 870,790 997,903 1,122,889
Export 39,295 53,024 70,023 147,557 154,935 178,175
Total Sales 674,924 764,848 792,167 1,018,347 1,152,838 1,301,064
% yoy ch 20.1 13.3 3.6 28.6 13.2 12.9
Source: Company, Angel Research
Exhibit 11: Angel v/s consensus forecast
Angel estimates Consensus Variation (%)
FY11E FY12E FY11E FY12E FY11E FY12E
Top Line (Rs cr) 33,710 39,551 33,856 38,358 (0.4) 3.1
EPS (Rs) 79.7 92.9 90.7 101.7 (12.2) (8.6)
Source: Company, Angel Research, Bloomberg
July 26 2010 6
12. Maruti Suzuki | 1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Maruti Suzuki
1. Analyst ownership of the stock Yes
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 26 2010 12
