Maruti Suzuki India Ltd. (MSIL) (CMP: Rs.1,129.10)
Q2FY12 Result Update November 04, 2011
MSIL recently reported its Q2FY12 results, which were below estimates. Given below are some of the key highlights, which we came across while reviewing the results.
Key highlights of Q2FY12 results:
MSIL reported decline of 15.7% y-o-y (9.4% q-o-q) in its net sales to Rs.7,537.5 cr mainly due to lower volumes (down by 19.6% y-o-y and 10.4% q-o-q) led by slowdown in
passenger car demand and labour unrest at the Manesar facility. Average net realisation grew by 4.8% y-o-y (1.1% q-o-q) due to price increases and higher share of diesel car
sales.
EBITDA margin witnessed a steep 410 bps y-o-y decline and stood at 6.6% due to lower volumes, higher discounts and high commodity costs – Rs.26 cr of mark-to-market (MTM)
loss on commodity hedges and other expenditure.
As a result of disappointing operating performance, net profit fell substantially by 59.8% y-o-y (56.2% q-o-q) to Rs.240.4 cr. Higher depreciation expense and lower-than-expected
other income also impacted MSIL’s bottom-line growth.
Quarter Financials:
(Rs. in Cr)
Particulars Q2FY12 Q2FY11 % Chg Q1FY12 % Chg Remarks
Sales degrew on account of loss of production due to labour unrest at its plant. This
Net Sales 7537.5 8937.1 -15.7% 8319.0 -9.4% resulted in volumes dropping by 19.6% y-o-y.
Income from services 38.0 40.3 -5.7% 41.6 -8.7%
Other Operating Income 256.2 169.9 50.8% 167.8 52.7%Increased due to write backs of Rs 60 crs during the quarter
Total Income 7831.6 9147.3 -14.4% 8528.4 -8.2%
Expenditure 7337.4 8187.0 -10.4% 7714.9 -4.9%
Materials to sales ratio increased by 250 bps y-o-y due to higher commodity prices,
Raw Materials 6156.6 7075.6 -13.0% 6691.7 -8.0% higher sales discounts and MTM loss on commodity hedges (Rs.27 cr)
Although Management cut salaries of the workers on strike, addition of new workers
Employees Cost 199.5 156.8 27.2% 179.4 11.2% led to higher employee costs
• Manufacturing and Admin Cost to Sales was higher by 140 bps y-o-y due to Yen
appreciation impact on royalty (Rs.100 cr)
Other Expenditure 981.4 954.5 2.8% 843.8 16.3% • Selling and Distribution cost was higher by 90 bps due to higher advertising costs
Operating Profit 494.2 960.3 -48.5% 813.5 -39.3%
OPM % 6.6% 10.7% 9.8% -33.0%Dropped to its lowest level in last ten quarters
Other Income 117.7 134.0 -12.1% 180.1 -34.6%Declined sequentially due to lower cash generation
Interest 10.9 9.7 12.3% 5.8 89.9%Rose due to increase in working capital
Depreciation 266.4 238.2 11.8% 242.3 9.9%Higher on account of commissioning of Manesar plant-B
Profit before Tax 334.6 846.4 -60.5% 745.6 -55.1%
PBTM % 4.4% 9.5% 9.0% -50.5%
Tax 94.2 248.1 -62.0% 197.0 -52.2%
Effective Tax Rate % 28.1% 29.3% 26.4% 6.5%
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Net Profit 240.4 598.2 -59.8% 548.5 -56.2%
NPM % 3.2% 6.7% 6.6% -51.6%
Equity Capital 144.5 144.5 0.0% 144.5 0.0%
EPS 8.3 20.7 -59.8% 19.0 -56.2%
(Source: Company, HDFC Sec)
Some observations on Q2FY12 results:
Volume Break up:
Particulars Q2FY12 Q2FY11 % Chg Q1FY12 % Chg Remarks
A1 5,446 5,207 4.6% 6,613 -17.6%
A2 152,266 198,953 -23.5% 171,090 -11.0%
A3 24,680 31,362 -21.3% 30,612 -19.4%
A4 54 0 - 117 -53.8%
C 37,616 41,596 -9.6% 40,749 -7.7%
MUV 2,344 818 186.6% 1,502 56.1%
Total Domestic Sales 222,406 277,936 -20.0% 250,683 -11.3%
While European exports remained under pressure, it was largely offset by strong
non-EU exports, resulting in increase in non-EU share to ~70% to exports (v/s 67%
Exports 29,901 35,718 -16.3% 30,843 -3.1% in Q1FY12 v/s 60% in Q4FY11).
Due to the strike at its Manesar plant, MSIL lost production, which resulted in lower
sales. Also slowdown in demand resulted in a drop in market share by 530 bps q-
Total Sales 252,307 313,654 -19.6% 281,526 -10.4% o-q to 42% of the domestic car market (ex-Nano).
Realisation (Rs/vehicle) 298,741 284,935 4.8% 295,497 1.1%
EBIDTA/Vehicle
(Rs/vehicle) 19,587 30,617 -36.0% 28,896 -32.2%
Net Profit/Vehicle
(Rs/vehicle) 9,530 19,073 -50.0% 19,484 -51.1%
(Source: Company, HDFC Sec Research)
Other Highlights:
Volume de-growth of 19.6% y-o-y was driven by 20.3% y-o-y drop in domestic volumes and 16.3% drop in export volumes. MSIL lost ~28,539 units in Q2FY12 due to strike.
Discounts in Q2FY12 were higher by Rs.4,200/unit q-o-q (~Rs.5,000/unit y-o-y) to Rs.13,500/car and is a reflection of lower contribution of models with no discount like Swift/
Dzire.
Despite highest ever discounts, blended realizations improved by 4.8% y-o-y to Rs.298,741/unit, driven by higher accessories, higher diesel car sales and spare sales.
MSIL’s Q2FY12 JPY exposure on direct imports was hedged at JPY rate of ~81 and INR at Rs.46.5. On the back of sharp JPY depreciation (owing to Bank of Japan's
intervention), MSIL has done one round of hedging for H2FY12. It is looking to hedge JPY/USD at the level of ~79-80 for H2FY12. In Q3FY12, the vendor imports, which remain
unhedged, will be impacted due to JPY appreciation in Q2FY12 (as it comes with a lag of a quarter). The impact on vendor imports will be diluted by reversal of MTM loss on
royalty.
The management indicated that demand outlook remains challenging with festive season growth of just 2-3% y-o-y. With further rate hike, it doesn't expect volumes to recover in
near future.
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Furthermore, October volumes have been impacted due to strike at Manesar plant (52.2% fall y-o-y). Also, production at Manesar and SPIL (Suzuki Powertrain Indian Ltd) could
take time to ramp up and would be restored to pre-strike levels by January 2012.
While model-wise discounts are expected to remain stable at current levels, improvement in product mix with increased supply of Swift and Dzire is expected to result in lower
average discounts in H2FY12.
The vendor localization program is underway with target of reducing vendor imports from 15% to 9% of sales, translating into potential savings of 15-20% on commodity cost. It
expects to reduce vendor imports by ~200 bps every year for next 3 years, starting FY12.
The Board has approved to set-up a new plant in Mehsana, Gujarat. It would be buying ~1,400 acres of land (including land acquisition supported by the state government) and
the purchase of land would be subject to final negotiations on price.
Rural and other smaller markets are doing better than urban markets as per the management. Also, it indicated that there is no significant difference in urban and rural product
mix. The rural market mix increased to ~22% of domestic volumes (v/s 20% in Q1FY12).
Of 100,000 units booking for Swift, 85-88% bookings are for diesel variant.
Guidance:
Management has maintained its capex guidance of Rs.40 bn for FY12E. The capex would be spent on capacity expansion, R&D and marketing infrastructure. Management has
given a guidance of Rs30bn for FY13E. Capacity of MSIL’s diesel car portfolio comprising the SX4, Swift, Dzire and Ritz currently stands at 250,000 units.
The management does not expect to benefit from softening in commodity cost in H2FY12. It also indicated that some of the steel suppliers are actually demanding small price
hikes.
The depreciation charge is expected to increase from Q3FY12 onwards with the commissioning of the second plant in Manesar.
Concerns
The effect of an interest rate hike is large on actual demand as well as on sentiments, as ~70% of sales happen through financing. Car financing rates have gone up by nearly 2%
since RBI began its hawkish stance and currently hover around 12.5%. In addition the hike in petrol prices and inflation has also hurt the demand for automobiles.
Adverse currency movement (depreciation of INR vs USD, depreciation of Euro vs USD and appreciation of yen vs USD) could lead to higher input costs, higher other expenses
(on account of forex loss) and in turn hurt margins. MSIL imports 20% of its raw materials directly or indirectly and has ~5% exposure to JPY in terms of royalty payment.
With a rise in commodity prices and elevated royalty charges, MSIL could face pressure on its margins.
If labour issues recur, it could impact sales, market share and profitability going forward.
Conclusion & Recommendation
MSIL’s Q2FY12 results were significantly below street expectations due to a sharp decline in its operating margin. Its operating margin witnessed a significant contraction on account
of negative effects of operating leverage, higher discounts, high commodity cost and increased other expenditure. Management remained cautious for demand resulting from
continuous increase in fuel prices and rising interest rates. Moreover, increasing competition and labour unrest resulted in loss of market share.
While demand for petrol cars is sluggish, the full impact of Yen appreciation on imported raw material is likely to be witnessed in H2FY12 as the forex exposure is unhedged and
promotion and discounts are likely to stay high amidst poor demand. Given the current scenario, the outlook for FY12 stays challenging.
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MSIL is likely to face challenges in the form of hardening interest rates driven by inflationary pressure (as about 70% of its cars are being financed). Moreover, the capacity
constraints currently faced are likely to limit its volume growth. Heightened competition in the compact car segment with new entrants could result in margin pressure.
Due to lull in demand environment, forex fluctuations, higher input costs and loss of production due to labour unrest, FY12 estimates could be underachieved and thus we are
revising it downwards. We are also introducing FY13 estimates. At the CMP of Rs.1,129.1, the stock is trading at 15.4x its FY13E earnings of Rs.73.3. In H2FY12, MSIL could
recover lost growth after new model launches and capacity expansions. But by how much is a question.
In our Q1FY12 result update dated August 01, 2011, we had stated that the stock could trade in the Rs.1,097-Rs.1,325 band for the next quarter. Post the issue of the report, the
stock made a low of Rs.1,010 on October 17, 2011 and made a high of Rs.1,287 on August 10, 2011.
We feel that the stock could trade in the Rs.990 - Rs.1,246 (13.5-17x FY13E EPS) band for the next quarter.
Financial Estimates:
Particulars (Rs in Crs) FY09 FY10 FY11 FY12 (OE)* FY12 (RE)* FY13 (E)*
Operating income 20413.3 29623.0 36128.2 41265.5 34650.0 39970.0
PBIDT 2020.9 3954.3 3664.4 4497.8 2910.6 3557.3
PBIDTM (%) 9.9% 13.3% 10.1% 10.9% 8.4% 8.9%
Profit after Tax 1482.5 2497.6 2288.6 2640.9 1732.5 2118.4
PATM (%) 7.3% 8.4% 6.3% 6.4% 5.0% 5.3%
EPS 42.2 86.4 79.2 91.4 60.0 73.3
P/E (x) 26.8 13.1 14.3 12.4 18.8 15.4
* - Quick Estimates (Source: Annual Report, HDFC Sec Estimates)
Analyst: Sneha Venkatraman (sneha.venkatraman@hdfcsec.com)
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