31 October 2012
2QFY13 Results Update | Sector: Automobiles
Maruti Suzuki
BSE SENSEX
S&P CNX
18,431
5,598
CMP: INR1,395
TP: INR1,730
Buy
Bloomberg
MSIL IN
Diluted Equity Shares (m) 302.1
52-Week Range (INR)
1,6,12 Rel.Perf.(%)
M.Cap. (INR b)
M.Cap. (USD b)
1,498/906
5/-5/20
421.3
7.8
Maruti Suzuki’s (MSIL) EBITDA margin for 2QFY13 was higher than our estimate, buoyed by lower than expected
staff cost and other expenditure (due to write-back of 1QFY13 royalty provision). Further, higher other income
and lower tax boosted PAT to INR2.27b (v/s our estimate of INR1.18b).
Volumes declined 22% QoQ (9% YoY), impacted by labor issues at Manesar (production loss of ~77,000 vehicles)
and poor demand for petrol vehicles. Higher sales of
Ertiga
(including CKD exports) diluted the impact of
adverse mix (lower share of diesel vehicles) and higher discounts. Realizations declined 1.6% QoQ (grew
19.5% YoY) to INR350,302/unit (v/s our estimate of INR347,724/unit).
EBITDA margin contracted 120bp QoQ (20bp YoY) to 6.1% (v/s our estimate of 4.7%), impacted by (a) adverse
mix, (b) lag impact of a weak INR in 1QFY13 on vendor imports, (c) higher discounts on weak petrol demand,
and (d) negative operating leverage. Royalty was lower by 80bp QoQ due to marking-to-market (MTM) of
1QFY13 royalty provisioning at a favorable exchange rate as at September 2012.
Earnings call highlights:
(1) Demand has improved with the onset of the festive season and new
Alto
launch,
(2) Order backlog: New
Alto
~30,000; diesel vehicles ~125,000 units, (3) Raw material cost to remain largely
stable, barring exchange rate movement, (4) Overall royalty to remain in the 5.5-6% range, despite new
Alto
launch, (5) 2HFY13 average discount to be lower both sequentially and YoY, (6) Phase-1 of new diesel engine
plant (capacity of 150,000 units) to come on stream in Sep-13.
Valuation & view:
We are upgrading our EPS estimates for FY13/FY14 by 3.4%/3.6% to INR69.5/INR98.2 to
factor in higher realizations and lower fixed costs. The stock trades at 14.2x FY14E consolidated EPS of INR98.2
and 8.1x FY14E cash EPS of INR172.6. Maintain
Buy
with a price target of INR1,730 (~10x FY14E cash EPS).
Jinesh Gandhi
(Jinesh@MotilalOswal.com) + 91 22 3982 5416
Chirag Jain
(Chirag.Jain@MotilalOswal.com) + 91 22 3982 5418
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Maruti Suzuki
Labor issues at Manesar plant impact 2QFY13 performance
Overall volumes declined 22% QoQ (9% YoY) to 230,376 units. While domestic
volumes declined 5.6% YoY (20% QoQ), exports declined 31.7% YoY (37% QoQ).
The labor issue at Manesar impacted volumes by ~77,000 units in 2QFY13.
Realizations declined 1.6% QoQ (grew 19.5% YoY) to INR350,302/unit (v/s our
estimate of INR347,724/unit), impacted by lower diesel vehicle sales (on
production constraints) and higher discounts (on weak demand for petrol vehicles),
partially negated by higher
Ertiga
sales (including CKD exports).
MSIL’s market share in the domestic PV industry declined ~600bp QoQ (340bp YoY)
to 34.1%, reflecting loss of volumes due to the Manesar labor issue.
Average discount increased by INR3,100/unit QoQ (INR2,150/unit YoY) to
INR14,750/unit in 2QFY13, reflecting higher discounts on petrol cars and adverse
mix (lower supplies of
Swift
and
Dzire).
Revenue declined 23% QoQ (grew 8% YoY) to INR83b (v/s our estimate of INR82.5b),
driven primarily by lower volumes.
Trend in volumes (‘000 units)
2Q
FY13
A1
4.2
% of total
1.8
MPV
31.1
% of total
13.5
A2
125.6
% of total
54.5
A3
27.6
% of total
12.0
% of total
0.0
UV
21.4
% of total
9.3
Exports
20.4
% of total
8.9
Total Sales
230.4
Total PV (Incl Exports) MS (%)
30.9
Total Dom. Car MS (%)
37.7
Total Dom.Car(ex-Nano) MS (%) 39.4
2Q
FY12
YoY
(%)
1Q
FY13
QoQ
(%)
FY13-
YTD
FY12-
YTD
CHG
(%)
5.5
-22.8
2.2
37.6
-17.3
14.9
152.3
-17.5
60.3
24.7
11.9
9.8
0.0
2.3
813.0
0.9
29.9
-31.7
11.8
252.4
-8.7
34.5 -360bp
40.9 -320bp
41.6 -220bp
4.4
-4.2
1.5
28.1
10.8
9.5
163.4
-23.1
55.2
48.4
-43.0
16.4
0.0
19.0
12.8
6.4
32.6
-37.4
11.0
295.9
-22.2
37.2 -630bp
44.4 -670bp
46.5 -710bp
8.6
12.1
-28.7
1.6
2.3
59.2
78.4
-24.5
11.2
14.7
289.0 323.4
-10.6
54.9
60.6
76.0
55.3
37.5
14.4
10.4
0.0
0.0
40
4 949.6
7.7
0.7
53.1
60.7
-12.7
10.1
11.4
526.3 533.8
-1.4
34.1
36.7 -250bp
41.3
42.9 -160bp
43.2
44.3 -110bp
Source: Company, MOSL
Trend in domestic PV market share (%)
Source: Company, MOSL
31 October 2012
2

Maruti Suzuki
Trend in realizations (INR '000)
Discount increases due to weak petrol demand & poor mix
Source: Company, MOSL
EBITDA margin shrinks due to poor mix, lower volumes and lag impact of a
weak INR in 1QFY13 on vendor imports
Gross margin declined 180bp QoQ (110bp YoY) to 20.4% (v/s our estimate of 21.2%),
driven by lower share of diesel vehicles, increase in average discount and adverse
forex movement (lag impact on vendor imports).
EBITDA margin declined 120bp QoQ (20bp YoY) to 6.1% (v/s our estimate of 4.7%),
impacted by negative operating leverage, but supported by write-back of 1QFY13
royalty provision of INR380m on favorable forex rates as at the end of 2QFY12.
Overall, other expenses (including staff cost) were lower by 60bp QoQ (150bp
YoY).
It has not provided for the model fee and royalty on the new
Alto 800,
as it is yet
to finalize the royalty rate on the new
Alto.
EBITDA declined 35% QoQ (grew 15% YoY) to INR5.01b. Adjusted PAT declined 5%
YoY (46% QoQ) to INR2.27b (v/s our estimate of INR1.18b).
Other income grew 39% QoQ (9% YoY) to INR1.56b (v/s our estimate of INR1.25b),
primarily driven by INR430m MTM gain on commodity hedges.
The tax rate for 2QFY13 was 18.7% (v/s our estimate of 19.5%). The management
has guided tax rate of ~20% for FY13.
31 October 2012
3

Maruti Suzuki
Trend in EBITDA
Royalty & Other exp drops on a sequential basis
Source: Company, MOSL
Forex – USD/INR leg remains open; a cause of concern
Direct exposure:
The management indicated that it has hedged 1/3
rd
of its USD/
JPY direct exposure for the remainder of 2HFY13. Considering the recent favorable
movement in USD/JPY, MSIL has started taking hedges for the balance part of the
direct exposure. For its USD/INR exposure, the company has a natural hedge
through exports.
Indirect exposure:
While MSIL has taken some hedges for its USD/JPY exposure,
the USD/INR leg is largely open.
To reduce forex exposure, the company aims to increase its exports to 15% of
sales and reduce its import exposure. Exports would be increased through a
combination of exploring new markets (like Africa) and exporting newer products.
On the other hand, the company is working on reducing its import exposure through
localization at the vendors’ end. Its initiatives to increase localization and reduce
dependence on imports should reflect over the next 2-3 years.
Our estimates factor in JPY/INR of 0.684/0.663 for FY13/FY14. For a 1% JPY/INR
movement, MSIL’s FY14E EBITDA margin would change by ~15bp and EPS would
change by ~2.3%.
Dieselization continues, with no trend reversal yet
During 1HFY13, ~58% of the industry’s passenger vehicle sales were of diesel
variants, as against 35% five years ago. While petrol vehicle volumes declined
20%, diesel vehicle volumes grew 40%.
While the gap between petrol and diesel prices has narrowed post the recent
INR5/liter hike in diesel prices, MSIL has not witnessed a meaningful shift in
demand back towards petrol vehicles.
The management expects demand for diesel vehicles to remain strong, with high
disparity between petrol and diesel prices (despite the recent diesel price hike)
and increase in income levels.
The UV segment has been outperforming the PV industry due to (1) UVs being
primarily diesel powered vehicles, (2) maturity of Indian customers, who are now
looking to upgrade from premium hatchbacks/sedans to UVs, and (3) new launches
in the segment.
31 October 2012
4

Maruti Suzuki
Other conference call highlights
The management indicated that the overall demand scenario has improved, with
the start of the festive season and the launch of new
Alto.
Demand during various
festive seasons such as Onam (South), Ganapati (West), Navratri has grown YoY.
However, demand for petrol cars, though higher sequentially, remains weak – in
line with the overall weakness in the petrol car segment.
Response to the new
Alto
has been good, with over 30,000 bookings already
received since launch. The current order book for diesel vehicles stands at over
125k units.
The Manesar plant has ramped-up well and is currently producing 1,600units/
day. MSIL expects to reach its peak production level of 1,800units/day at Manesar,
shortly.
It would sell 400,000 diesel vehicles in FY13; MSIL did not stop making diesel
engines (at SPIL) even during the Manesar plant lockout.
Channel inventory remains under control at 2-3 weeks v/s 4-6 weeks around six
months ago.
MSIL took a price increase of ~1% on an average with effect from October 2012.
Raw material cost is likely to remain largely stable, barring forex movement.
Recent wage negotiations would result in a 15-30bp increase in employee cost
over the next 2-3 years.
Despite the launch of new
Alto,
the management expects royalty payments to
continue to be in the range of 5.5-6%.
The management expects discount levels to have peaked and expects a decline
in 2HFY13, driven by higher diesel cars in its sales mix and better demand for
petrol cars.
Phase-1 of the new diesel engine plant, with a capacity of 150,000 units, is likely
to come on stream in September 2013. Phase-2, with another 150,000 unit capacity
will come up by June 2014.
MSIL is contesting a claim of INR5b from Haryana State Industrial & Infrastructure
Development Corporation Limited (HSIIDC) in the Supreme Court. This relates to
additional compensation for landowners for land acquired by MSIL for industrial
purposes. The company has not made any provision for the claim, as the amount
is not determinable at this stage. Further, it has written back ~INR2.35b provided
earlier, based on HSIIDC’s demand.
Upgrading FY13/FY14 estimates by 3.4%/3.6%
We upgrade our consolidated EPS estimates by 3.4%/3.6% for FY13/14 to INR69.5/
INR98.2, driven by improvement in our margin assumptions on better mix, higher
volumes and lower discounts.
We expect MSIL to register volume growth of 4% in FY13 and 15% in FY14 (FY12-14E
CAGR of 9.2%, FY11-14E CAGR of 2.1%). EBITDA margin for FY13/FY14 would be
8.8%/10.3%.
Our estimates factor in JPY/INR of 0.684/0.663 for FY13/FY14 and 0.5%/1% reduction
in import content.
31 October 2012
5

Maruti Suzuki
Revised forecast (INR B)
Rev
Total Volumes (‘000)
Domestic
Exports
Net Sales
EBITDA Margin (%)
PAT
Consol EPS (INR)
Cash EPS (INR)
1,177
1,055
122
421
8.8
20.7
69.5
131.2
FY13E
Old
1,177
1,055
122
417
8.5
20.0
67.2
127.4
Chg (%)
0.0
0.0
0.0
0.9
20bp
3.5
3.4
3.0
Rev
1,352
1,197
155
494
10.3
29.3
98.2
172.6
FY14E
Old
1,352
1,197
155
490
9.9
28.2
94.8
166.0
Chg (%)
0.0
0.0
0.0
0.8
40bp
3.7
3.6
4.0
Source: MOSL
Valuation and view
The operating environment for MSIL is gradually improving, with (a) initial signs
of demand recovery, driven by new
Alto
launch and onset of the festive season,
(b) discount stabilization, (c) INR appreciation, and (c) possible permanent solution
to its industrial relationship problem (with the conversion of temporary workers
to permanent workers, and liberal wage hikes).
Continued volume revival, discount reduction and higher diesel engine availability
(expected from September 2013) would be the key catalysts for operating / stock
performance, apart from favorable forex movement.
We expect upside risk to our volume growth estimates if demand momentum
continues to be healthy beyond the current festive season.
The stock trades at 14.2x FY14E consolidated EPS of INR98.2 and 8.1x FY14E cash
EPS of INR172.6. Maintain
Buy
with a price target of INR1,730 (~10x FY14E cash EPS;
17.6x FY14E consolidated EPS).
31 October 2012
6

Maruti Suzuki
Maruti Suzuki: an investment profile
Company description
Maruti Suzuki is the largest passenger vehicle
manufacturer in India, with 1.2m units. It dominates the
domestic cars segment with ~41% market share. It is also
emerging as the global export hub of small cars for
Suzuki, with world strategic model A-Star exclusively
produced in India. It has recently launched
Ertiga
and
new
Alto 800.
Its two plants are in Haryana - Gurgaon
and Manesar.
Higher royalty and strengthening of commodity
prices could impact margins.
Recent developments
Manesar plant is ramping up well and currently
production ~1600 units/day.
The company has recently launched the new Alto
800 and has received over 30k bookings.
Valuation and view
The stock trades at 14.2x FY14E consol EPS of INR98.2
and 8.1x FY14E Cash EPS of INR172.6.
Maintain
Buy
with price target of INR1,730 (~10x FY14
CEPS/17.6x FY14 consol EPS).
Key investment arguments
Volumes momentum to remain intact in long run,
despite short-term headwinds, resulting in 12%
CAGR (FY12E-15E) in MSIL’s domestic volumes
Volume growth in domestic market driven by focus
on tier-II cities and rural market, recent launches and
increase in diesel engine capacity.
Improving product mix with increasing share of A2,
A3 and UV segment, driven by newer products.
Sector view
Short term pressure notwithstanding, passenger
vehicle segment is expected to continue its growth
momentum over medium to long term.
With low car penetration levels and rising income
levels, the upside potential for growth is
tremendous.
However, increasing competition poses threat in long
term.
Key investments risks
Increasing competition in the key A2 segment.
Adverse forex movement may impact margins
negatively.
Comparative valuations
Maruti
P/E (x)
FY13E
FY14E
EPS Gr (%)
FY13E
FY14E
RoE (%)
FY13E
FY14E
EV/EBITDA (x) FY13E
FY14E
20.1
14.2
19.4
41.3
10.9
13.6
9.1
6.2
M&M
15.2
14.3
19.0
6.6
22.0
19.7
8.3
7.3
Tata Motors
7.5
6.0
-12.0
24.4
25.2
24.7
3.5
2.9
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
69.5
98.2
Consensus
Forecast
66.6
95.0
Variation
(%)
4.4
3.3
FY13
FY14
Target price and recommendation
Current
Price (INR)
1,395
Target
Price (INR)
1,730
Upside
(%)
24.0
Reco.
Buy
Stock performance (1 year)
Shareholding pattern (%)
Promoter
Domestic Inst
Foreign
Others
Sep-12
54.2
16.2
20.5
9.1
Jun-12
54.2
16.4
20.4
9.0
Sep-11
54.2
17.7
19.3
8.8
31 October 2012
7

Maruti Suzuki
Financials and Valuation
31 October 2012
8

Maruti Suzuki
N O T E S
31 October 2012
9

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Maruti Suzuki
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