12 March 2012
Update
Maruti Suzuki
CMP: INR
TP: INR1,690
Buy
Entering upgrade cycle; Blue-sky EPS of INR122 in
FY13; Potential ~50% return in 12 months; Buy
After 2 years of earnings downgrades, we believe Maruti Suzuki is entering
an upgrade cycle.
We estimate FY13 bull-case EPS of INR122 based on 5% JPY/INR appreciation
from current estimate of 0.62 (to 0.59), monthly run-rate of 121,000
units/month (i.e 28.5% volume growth in FY13 over FY12s low-base) and
normalization of discounts.
Our base-case 12-month target price is INR1,690, 29% upside. We estimate
blue-sky 12-month target price is INR2,002 (11x FY14 cash EPS), 53% upside.
MSIL offers ~29% return in base case and ~53% return in bull case
MSIL trades near historical average cash PE of ~11x
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Maruti Suzuki
Maruti entering earnings upgrade cycle?
After 2 years of earnings downgrades, we believe Maruti Suzuki is entering an
upgrade cycle driven by (1) normalization of production, (2) enabling macro
environment, (3) favorable Fx, and (4) cost-cutting initiatives.
The current FY13 consensus estimate of INR83.2 has witnessed multiple
downgrades totaling to ~23% cut since April 2011. Sustained volume recovery
and INR appreciation would drive earnings upgrades.
While we recently upgraded our FY13 consolidated EPS estimates by 16% to
INR86 (based on 15.8% volume growth to 1.3m and JPY/INR of 0.62), there is
headroom for further upgrades. Based on current volume run-rate of ~115,000
units/month and JPY/INR of 0.605 (current rate), MSIL’s FY13 consolidated EPS
works out to INR99. We estimate bull-case FY13 EPS of INR122.
Maruti’s FY13 consensus EPS (INR)
Maruti’s FY13 EPS could grow ~126% in bull case & ~59% in base case
12 March 2012
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Maruti Suzuki
Like in the past, can EPS estimate swing meaningfully from beginning of the
year consensus estimates?
Maruti’s EPS estimates have been significantly volatile over last 5 years, with 11-
55% divergence in actual EPS over beginning of the period estimates.
We estimate a bull-case consolidated EPS of INR122 for FY13, which is ~47%
higher than consensus and ~42% higher than our own base-case estimate.
Bull-case EPS of INR122 is based on 5% JPY/INR appreciation from current
assumption of 0.62 (to 0.59), monthly run-rate of 121,000 units/month (i.e
28.5% volume growth in FY13 over FY12s low-base), and normalization of
discounts.
MSIL consensus estimates have been volatile with over 50% difference between peak and trough estimates during the period of f orecast (EPS
in INR)
Even after factoring in ~16% volume growth in FY13E, volumes will be back to FY11 level
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Maruti Suzuki
Can FY13 consol EPS be over INR120?
Our estimates factor in volume growth of 15.8% to 1.3m in FY13, implying
monthly run-rate of ~109,000 units/month (v/s ~94,000 in FY12E and ~106,000
in FY11). These estimates factor in increase in fuel prices by INR3/ltr for both
petrol and diesel, and levy of diesel tax of INR25,000-80,000/vehicle.
Any positive surprises on expected policy changes can drive up volumes for the
industry and MSIL. In bull-case, we estimate MSIL volumes to grow 28.5% to
1.45m units in FY13 driven by no diesel tax and Ertiga’s average volumes of
5,000 units/month (v/s 2,500 in base case). While 28.5% volume growth or
~121,000 units/month appears very aggressive, it is just ~6.8% CAGR over FY11
(v/s 10 year CAGR of 12-13%).
We estimate FY13 EBITDA margins of 9.4% (+230bp over FY12) driven by
operating leverage, price increase (of ~0.7% in Jan-12), product mix
improvement, part normalization of discounts, increasing localization, but
adverse JPY/INR at 0.62 (v/s 0.61 in FY12E).
In bull case, we expect EBITDA margins of 11.6% driven by 5% JPY/INR
appreciation (to 0.59 v/s 0.62 in base case), full normalization of discounts and
operating leverage. As a result, FY13 consolidated bull-case EPS can be ~INR122.
Maruti’s FY13 volumes potentially can grow ~29% i.e. to 1.45m,
translating into EPS of INR100 (with no change in JPY/INR & discounts
Maruti’s FY13 volumes in base case are estimated to grow ~16% or 109,000 units/month
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4

Maruti Suzuki
Maruti’s EBITDA margins in FY13 can potentially be over 11% and consol EPS over INR120
Potential to deliver over 50% return in 12 months; Buy
MSIL has outperformed Sensex by ~29% and delivered absolute returns of 41%
in CY12YTD, driven by reversal of adverse currency movement.
We estimate volume growth of 15.8% in FY13 (to 1.3m units) and 15% in FY14
(to 1.5m units). We estimate margin expansion of 230bp in FY13 to 9.4% and
further 50bp margin expansion in FY14 to 9.9%.
We value MSIL on FY14E cash PE of 11x, which is its historical average. We
believe demand and margin-led earnings upgrade cycle merits average historical
valuations, despite deterioration in competitive landscape.
Our base-case consolidated EPS estimate for FY13 and FY14 is INR86 and
INR106.7, and cash EPS estimate is INR127.5 and INR153.6.
Buy with 12-month
target price of INR1,690 (11x FY14 cash EPS @ 15% volume CAGR FY12-14 and
JPY/INR of 0.62), an upside of 29%.
We see potential upside of over 50% in 12 months based on FY14 bull-case EPS
estimate of INR130 (@ 18% volume CAGR FY12-14 and JPY/INR of 0.59) and cash
EPS of INR182. We estimate blue-sky 12-month target price of INR2,002 (11x
FY14 cash EPS), 53% upside.
Key risks:
(1) Adverse policy action (steep hike in excise and fuel prices), and (2)
Adverse JPY/INR.
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Maruti Suzuki
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Maruti Suzuki LTD
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12 March 2012
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