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4 MARUTI SUZUKI INDIA LTD RESEARCH EQUITY RESEARCH January 28, 2010 Results Review Maruti Suzuki India Limited Hold Share Data Providing impetus; keeping up the growth pace Market Cap Rs. 400.4 bn In line with our estimates, Maruti Suzuki India Limited (MSIL) reported net Price Rs. 1,386.00 sales of Rs. 73.3 bn, a 60.6% yoy, on account of a 48.7% volume growth and BSE Sensex 16,306.87 an 8% realization gain. The EBITDA margins were better-than-expected at Reuters MRTI.BO 15.5% in Q3’10 as against 7.7% in Q3’09 primarily due to lower commodity Bloomberg MSIL IN Avg. Volume (52 Week) 0.2 mn prices and improved operating leverage. In the near-to-medium term, we 52-Week High/Low Rs. 1,740.0 / 512.1 expect MSIL to have robust sales volume by capitalizing the opportunities in Shares Outstanding 288.9 mn the auto market through its new launches, capacity expansion plans and exploring new markets. Our revised target price of Rs. 1,550 suggests a Valuation Ratios (Consolidated) potential upside of ~12% from the current levels. Thus, we maintain Hold Year to 31 March 2010E 2011E rating on the stock. EPS (Rs.) 85.9 98.5 +/- (%) 102.3% 14.7% Sustainable growth in domestic volumes: In Q3’10, MSIL’s total volumes PER (x) 16.1x 14.1x grew by 37.8% yoy to 218,910 units. In the near-to-medium term, MSIL’s EV/ Sales (x) 1.4x 1.2x new launches and strong market positioning (~50% market share) places it EV/ EBITDA (x) 9.8x 8.5x well to capitalize on the opportunities arising in the domestic auto market out Shareholding Pattern (%) of lower penetration, increasing per capita income, rising sub-urban demand, Promoter 54.2 and cheap auto finance. In addition, with MSIL reaching one-million-unit- FIIs 21.8 mark by March 2010, it plans to undertake huge capacity addition of ~25% Institutions 17.4 by April 2012 from the current capacity of 1 mn units/year. This expansion Public & Others 6.7 would help MSIL meet the growing demand in the auto sector in the medium Holding >1% (Non-Promoter) term. However, its main segment (A2 segment contributing ~ 70% to the total LIC of India 8.4 revenue) would feel the heat of increasing competition from the existing HSBC Global Investment Funds 4.6 ICICI Prudential Life Insurance 2.1 players as well as from entry of various foreign players into the A2 segment. LIC of India Market Plus 1.5 Redefining the scope of exports: In Q3’10, MSIL exports increased LIC India Money Plus 1.3 167.3% yoy to 39,116 units primarily due to the “scrappage" incentive Relative Performance scheme of Europe. In coming quarters, the Company plans to offset the expected slowdown due to withdrawal of the “scrappage" incentive scheme 1,800 by exploring new markets in Middle East, South America, South East Asia 1,500 and Africa. MSIL’s A-star proved to be a huge success in European markets 1,200 900 during Q3’10. Recently, the Company has sent a batch of 500 units of Ritz to 600 Indonesia. Thus, we expect a muted growth in the export numbers in the 300 fourth quarter, however a gradual pick up in FY11. May-09 Mar-09 Nov-09 Jan-09 Feb-09 Apr-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Dec-09 Jan-10 Key Figures (Standalone) Quarterly Data Q3'09 Q2'10 Q3'10 YoY% QoQ% 9M'09 9M'10 YoY% (Figures in Rs. mn, except per share data) MSIL Rebased BSE SENSEX Net Sales 45,676 70,496 73,338 60.6% 4.0% 141,049 207,236 46.9% Adj. EBITDA 3,518 9,161 11,339 222.3% 23.8% 13,490 29,709 120.2% Adj. Net Profit 2,117 5,700 6,875 224.7% 20.6% 9,875 19,688 99.4% Margins(%) EBITDA 7.7% 13.0% 15.5% 7.76% 2.5% 9.6% 14.3% 4.8% NPM 4.6% 8.1% 9.4% 4.74% 1.3% 7.0% 9.5% 2.5% Per Share Data (Rs.) Adj. EPS 7.3 19.7 23.8 224.7% 20.6% 34.2 68.1 99.4% Please see the end of the report for disclaimer and disclosures. -1- 4 MARUTI SUZUKI INDIA LTD RESEARCH EQUITY RESEARCH January 28, 2010 Pressure on margins: Going forward, despite reporting a healthy EBITDA margins of 15.5% in Q3’10, we still maintain our view that the Company would face pressure on its margins due to hardening of commodity prices, introduction of BS IV technology in large volume models and increasing competition in the A2 segment. Thus, we expect the margins for FY10 and FY11 to be 14.2% and 14.6%, respectively as against 15.5% in Q3’10. Result Highlights In Q3’10, net sales increased 60.6% yoy to Rs. 73.3 bn on account of increase in volumes and realizations. The volumes increased primarily on the back of recovering domestic economy and cheap auto finance. The net realization was up by 8% yoy on account of better product mix. Following were the key operating highlights for the quarter; • MSIL’s total sales volume grew by 48.7% yoy. The domestic volumes increased 37.8% yoy to 218,910 units and export volumes increased 167.3% yoy to 39,116 units. • The net sales increased 60.6% yoy to Rs. 73.3 bn. • The net realizations improved 8% to Rs. 284,226. • The raw material cost percentage of net sales decreased 394 bps yoy to 76.2% mainly due to lower commodity prices, favorable product mix and price variance. • The staff cost percentage of net sales decreased 61 bps yoy to 1.8% in Q3’10. • Thus, the EBITDA margins stood at 15.5% in Q3’10 as against 7.7% in Q3’09 primarily due to robust sales, lower commodity prices and improved operating leverage. • The Company reported net profit of Rs. 6.9 bn in Q3’10 as against Rs. 2.1 bn in Q3’09. The net profit margin stood at 9.4% as against 4.6% in Q3’09. Segment performance • The A1 segment’s volume remained almost flat at 8,738 units. The segment contributed a mere 4% to the total volume. • The A2 segment’s volume was up by a stupendous 38.6% yoy to 159,678 units. It contributed 72.9% to the total volume. • The A3 segment’s volume also increased by a huge 41.7% yoy to 25,388 units. It contributed 11.6% to the total volume. • The C segment’s volume witnessed an increase of 57% yoy to 24,426 units. Its contribution to the total volume increased to 11.2%. • The MUV segment’s volume declined by 58.3% yoy to 680 units. It contribution declined to 0.3% to the total volume. Please see the end of the report for disclaimer and disclosures. -2- 4 MARUTI SUZUKI INDIA LTD RESEARCH EQUITY RESEARCH January 28, 2010 Key Events • In January, MSIL launched an all-new spacious family car Eeco. • In January, MSIL unveiled a concept car, named Concept R-III. Key Figures (Consolidated) Year to March FY08 FY09 FY10E FY11E FY12E CAGR (%) (Figures in Rs. mn, except per share data) (FY09-12E) Net Sales 180,208 205,579 276,929 314,434 374,630 22.1% Adj. EBITDA 27,837 18,675 39,444 45,841 55,381 43.7% Adj. Net Profit 17,899 12,275 24,832 28,479 35,514 42.5% Margins(%) EBITDA 15.4% 9.1% 14.2% 14.6% 14.8% NPM 9.9% 6.0% 9.0% 9.1% 9.5% Per Share Data (Rs.) Adj. EPS 62.0 42.5 85.9 98.5 122.9 42.5% PER (x) 22.4x 32.6x 16.1x 14.1x 11.3x Valuation We hold a positive outlook towards the auto sector in the near-to-medium term on the back of low penetration, increasing per capita income and easy availability of funds. Moreover, we expect MSIL to take advantage of this opportunity through its strong market positioning, new launches and capacity expansion plans underway. However, we expect the increasing competition in the A2 segment may serve as a spoilsport. Our DCF valuation, assuming a 12.8% of WACC and a 5% of terminal growth rate, gives a target price (TP) of Rs. 1,550, which provides for a limited upside potential of 11.8% from the CMP of Rs. 1,386. Hence, we maintain our Hold rating on the stock. Sensitivity of Our Fair Value Estimate WACC Terminal growth 1,550 11.8% 12.3% 12.8% 13.3% 13.8% 4.00% 1,642 1,549 1,467 1,394 1,328 4.50% 1,696 1,595 1,506 1,427 1,357 5.00% 1,758 1,647 1,550 1,465 1,389 5.50% 1,830 1,707 1,600 1,507 1,425 6.00% 1,914 1,776 1,657 1,555 1,466 Please see the end of the report for disclaimer and disclosures. -3- 4 MARUTI SUZUKI INDIA LTD RESEARCH EQUITY RESEARCH January 28, 2010 Disclaimer This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. 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