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					                        Headwinds
                       HH                                ahead with core issue left hanging fire
                                                                                                                                                                                                                    Fortune
Event update

                       HOLD                                                                                                                                                          June 17, 2011
                                                                                                 Maruti Suzuki
                       Sector outlook: Positive                                                                                                                                         Automobiles
                        




                           Target price: 1,198                                          The unfortunate 13-day work stoppage at MSIL’s Manesar plant will
                                                                                        have a lasting impact on India’s largest passenger carmaker as it
                           CMP: Rs1,193*
                                                                                        effectively erodes sales of its best selling models, viz., Swift, Dzire
                           Upside: 0%                                                   and SX4. These collectively account for 0.125 mn units sold in
                                                                                        5mCY11, constituting about 23% of MSIL’s total volumes. With the
                           * Price as on June 16, 2011                                  strike having ended after nearly two-weeks, the company will now
                      532500                              Sensex: 17,986                have to run an additional shift for about two months to make up for
                      MARUTI                              Nifty: 5,397
                                                                                        the production halt. This in our opinion is easier said than done as
                      MRTI.BO                             52 W-H/L:1585/1122
                                                                                        dealers would see a distinct slowdown of enquiries with competition
                                                                                        already breathing hard down MSIL’s taillights. Customers are more
                      MSIL.IN                             Face Value-Rs5
                                                                                        likely than ever to opt for competing models currently available in
                      Market cap (Rs mn)                  344,777                       the market.
                      Daily vol. (3M NSE avg.)            144,911                       We lower our earnings estimate for FY12E by 1.0% and FY13E by
                      Current share O/S (mn)              289                           1.4% leading to a reduced price target of Rs1,198, from the
                      Diluted shares (mn)                 289
                                                                                        previous Rs1,252. We, however, retain our HOLD rating.
                      Promoters holding (%)               54.2
                                                                                        Earnings impact: We have lowered our FY12E estimated sale volumes of
                                                                                        MSIL from 1.394 mn to 1.388 mn. This leads to a revenue contraction of
                                                                                        0.9% to Rs419 bn. Given that Swift and Dzire are high margin models, we
                                                                                        revise the EBITDA downwards 0.9% to Rs41.8 bn. The PAT is estimated to
                                                                                        decline by Rs266 mn to Rs26.3 bn. Given that competition is bound to make
                                                                                        gains, we expect MSIL to lose advantage to the extent that it may have to
                           Mahantesh Sabarad
                                                                                        budget for marginally higher incentives to regain lost market share even in
                           mahantesh.sabarad@fortune.co.in
                           +91 22 4300 3821                                             FY13E. This prompts us to lower the margin expectations by 10 bps in
                                                                                        FY13E dragging the earnings down.
                           Vijay Nara
                           vijay.nara@fortune.co.in
                           +91 22 4300 3822                                             Valuations to contract: We had earlier expected MSIL to trade at around
                                                                                        11.5x on a one-year forward basis. We foresee uncertainty surrounding
                                                                                        labour relations to prevail in the near future as the core demand of the
                                                                                        strikers for the formation of a new union has been left unresolved with MSIL
Equity Research




                                                                                        management rather looking at forming an individual body to address
                                                                                        workers’ grievances. Going forward, the possibility of more work stoppages
                                                                                        cannot be ruled out and we would therefore like to err on the side of caution
                                                                                        while calculating valuations. With a 11x multiple, we reduce our price target
                                                                                        to Rs1,198.

                              Key financials (Y/E March) (Standalone)                                                         Valuation / Ratios
                             (Rs mn)                            FY11E            FY12E                 FY13E                  (x)                              FY11E               FY12E                FY13E
                              Net sales                   370,401                419,004             473,393                  P/E                                14.8                   13.1                11.2
                              Growth (%)                         25.0                 13.1                 13.0
                                                                                                                              P/B                                  2.6                    2.2                 1.9
                              EBITDA                        36,644                 41,802              48,440
                                                                                                                              EV/EBITDA                            7.9                    6.7                 5.3
                              EBITDA (%)                          9.9                 10.0                 10.2
                                                                                                                              EV/Sales                             0.8                    0.7                 0.5
                              PAT                           23,358                 26,262              30,749
                              Growth (%)                        (6.5)                 12.4                 17.1               RoE (%)                            18.8                   18.0                17.9
              India




                              Diluted EPS                        80.9                 90.9               106.4                RoCE (%)                           17.5                   17.2                17.3
                              Source: Company, Fortune Research Estimates                                                     Source: Company, Fortune Research Estimates


                       See Disclaimer at the end of the report.                                                                                                                                                 1
                        
                                                                                                                                                                                               Fortune Group
                                                                                           Fortune Group 
 
    Estimate revision

    Exhibit 1: Lost volumes prompt earnings downgrade
                                Revised Estimates              Earlier Estimates                % Revision

                                 FY12E         FY13E               FY12E        FY13E          FY12E      FY13E

     Sale (Nos)             1,388,378       1,528,631        1,394,378      1,528,631           (0.4)         0.0

     YoY growth rate                 9.2            10.1              9.7            9.6     (47) bps     47 bps

     Net sales (Rs mn)          419,004       473,393          422,606         474,758          (0.9)       (0.3)

     EBITDA (Rs mn)              41,802        48,440              42,173       49,058          (0.9)       (1.3)

     EBITDA (%)                     10.0            10.2             10.0           10.3     (0.3) bps (10.1) bps

     Adj. PAT (Rs mn)            26,262        30,749              26,528       31,191          (1.0)       (1.4)

     EPS     (Rs)                   90.9        106.4                91.8        108.0          (1.0)       (1.4)
    Source : Fortune Research


    Manesar rolls out popular models

    The Manesar plant of MSIL produces popular models like Swift, Dzire and
    SX4. In the last five months, the average daily sale of these models was
    about 1,007. MSIL was intending to introduce its Sub-4 meter Dzire with
    an intention to reduce the incidence of excise duty and expand its market
    share.

    Exhibit 2: Sales of models from Manesar averages 1,007 per day
                                                                                              Monthly     Daily
     Sale units             Jan-11         Feb-11     Mar-11         Apr-11     May-11
                                                                                                 rate      rate
     Swift                      11,353     10,936      12,114         10,622        12,742      11,553      462

     Dzire                       9,771      9,490      10,278         11,797        10,812      10,430      417

     SX4                         2,159      3,534          3,632       2,102         2,702       2,826      113

     Total domestic         23,283         23,960     26,024         24,521      26,256         24,809     992

     Total export                 322        370            328         420           407          369      15

     Total                  23,605         24,330     26,352         24,941      26,663         25,178   1,007
    Source: Industry, Fortune Research


    Already, MSIL is facing increased competition in the segment with newer
    launches like the Etios, Vento and Verna marking their presence felt and
    gaining in popularity. Now, it’s the new Ford Fiesta that promises class
    leading features like cruise control.




                                                      Maruti Suzuki                                          2
                                                                                                                     Fortune Group 
 
    Exhibit 3: Dzire and SX4 market share declining in their segments
      Monthly domestic sales                                        Jan-11          Feb-11                  Mar-11           Apr-11           May-11

      Hyundai Motor          (Accent)                                   1,317              1,224                1,293              1,114        1,047

      Mahindra & Mahindra (Verito)                                      1,120              1,151                1,017              1,006        1,291

      Maruti Suzuki        (Dzire)                                      9,771              9,490               10,278         11,797           10,812

      Toyota Kirloskar Motor (Etios Sedan)                              1,651              2,786                3,257              4,657        3,412

      Specialty:

      Volkswagen         (Beetle)                                           20                25                     21               16                 3

      Total compact sedan                                           13,879          14,676                  15,866           18,590            16,565

      Dzire (Market share)                                              70.4               64.7                 64.8               63.5             65.3



      Ford (Fiesta)                                                     1,059              1,074                1,228              1,092        1,266

      General Motors              (Aveo)                                  240               172                   198               155              196

      Hindustan Motors (Lancer)                                             21                19                     74               20              19

      Honda Siel Cars             (City)                                5,059              3,668                2,773              1,542        1,828

      Hyundai Motor          (Verna)                                    1,858              1,241                  489              1,854        4,357

      Maruti Suzuki        (SX4)                                        2,159              3,534                3,632              2,102        2,702

      Tata Motors (Indigo, Manza)                                       2,449              3,036                2,543              1,561        1,018

      Volkswagen         (Vento)                                        2,308              3,548                3,973              2,866        2,403

      Specialty:

      Hindustan Motors (Ambassador)                                       330               302                   768               397              254

      Total Mid-size Sedan                                          15,483          16,594                  15,678           11,589            14,043

      SX4 Market Share                                                  13.9               21.3                 23.2               18.1             19.2
    Source: Industry, Fortune Research




    Exhibit 04: More headwinds ahead

       20.0
                                                                                                                                              13.5

                                                                                                                                              11.5
       18.0
                                                                                                                                              9.5

       16.0                                                                                                                                   7.5

                                                                                                                                              5.5
       14.0
                                                                                                                                              3.5

       12.0                                                                                                                                   1.5
                                                                                                                          May-11
                                                                                                      Mar-11
                                                                                  Jan-11
                                                      Oct-10



                                                                         Dec-10
                Jun-10




                                             Sep-10




                                                                                                                                     Jun-11
                         Jul-10




                                                                                                                 Apr-11
                                    Aug-10




                                                               Nov-10




                                                                                             Feb-11




                         P/E (LHS)                                 P/BV (RHS)                                      EV/E (RHS)
    Source: Industry, Fortune Research




                                                                   Maruti Suzuki                                                                     3
                                                                                                                                             Fortune Group 
    
  Standalone financial tables (Y/E March)                                                                                                                (Rs mn)
 Income statement          FY09       FY10      FY11        FY12E        FY13E        Balance sheet                FY09         FY10      FY11E      FY12E      FY13E
 Net sales                208,525 296,230 370,401 419,004 473,393                     Sources of funds

 % growth                    13.5       42.1       25.0         13.1         13.0     Equity capital                1,445       1,445      1,445      1,445      1,445
                                                                                      Reserves and surplus        92,004      116,906    137,230    160,949    188,986
 Raw materials            162,427    224,134   287,942      324,533      364,689
                                                                                      Shareholders’ funds         93,449 118,351 138,675 162,394               190,431
 % of net sales              77.9       75.7       77.7         77.5         77.0
                                                                                      Minority interest                   -          -          -          -          -
 Employee cost              4,711      5,456     7,036        9,176       10,841
                                                                                      Secured loans                       1       265        215        165        115
 % of net sales               2.3        1.8        1.9          2.2          2.3     Unsecured loans               6,988       7,949      2,878      1,878        878
 Other expenses            23,067     27,097    38,779       43,493       49,422      Total loan funds             6,989        8,214      3,093      2,043        993
 % of net sales              11.1        9.1       10.5         10.4         10.4     Deferred tax liab. – Net      1,551       1,370      1,644      1,719      1,794
 EBITDA                    18,321    39,543     36,644       41,802       48,440      Total liabilities          101,989 127,935 143,412 166,156               193,218
 EBITDA margin (%)            8.8       13.3        9.9         10.0         10.2     Appl. of funds

 Depn & amortn.                                                                       Gross block                 87,206      104,067    131,659    151,359    166,059
                            7,065      8,250    10,135       11,462       12,855
                                                                                      Accumulated depn.          (46,498)     (53,820)   (63,955)   (75,418)   (88,273)
 EBIT                      11,255     31,293    26,509       30,340       35,585
                                                                                      Capital WIP                   8,613       3,876      1,876      4,076        815
 Interest exps.               510       335        244          141           83
                                                                                      Net fixed assets            49,321      54,123     69,580     80,018      78,601
 EBT                       10,745     30,958    26,264       30,199       35,501
                                                                                      Other investments           31,733      71,766     51,067     70,862      91,493
 Other income               6,013      4,968     4,823        5,573        6,524      Inventories                   9,023      12,088     14,150     17,986     21,039
 Extraord. (Inc.)/Exps.         0         0             0            0            0   Sundry debtors                9,189       8,099      8,933     13,489     15,960
 PBT                       16,759     35,926    31,088       35,772       42,025      Other current assets            981         848      1,673      1,167      1,229
 Tax-Total                  4,571     10,949     8,201        9,510       11,277      Cash and bank balances      19,390          982     25,085     14,132     15,960

 Tax rate (%) – Total                                                                 Loans and advances          16,328       15,707     13,722     15,826     20,447
                             27.3       30.5       26.4         26.6         26.8
                                                                                      Total current assets        54,911      37,724     63,563     62,601      74,636
 Reported PAT              12,187    24,976     22,886       26,262       30,749
                                                                                      Current liabilities         30,169       29,394     35,540     40,444     44,434
 PAT margin(%)                5.8        8.4        6.2          6.3          6.5
                                                                                      Provisions                    3,807       6,284      5,258      6,880      7,078
 Extraord. inc./(Exps.)         0         0        472               0            0
                                                                                      Total current liab.         33,976      35,678     40,798     47,325      51,512
 Adjusted PAT              12,187    24,976     23,358       26,262       30,749      Net current assets          20,935        2,046    22,765     15,276      23,124
 PAT margin(%)                5.8        8.4        6.3          6.3          6.5     Misc. expenditure                   -          -          -          -          -
 % growth                   (72.2)     104.9      (6.5)         12.4         17.1     Total assets               101,989 127,934 143,412 166,156               193,218
 Source: Company, Fortune Research                                                    Source: Company, Fortune Research

 Ratios                    FY09       FY10     FY11E        FY12E        FY13E        Cash Flow                    FY09         FY10      FY11E      FY12E      FY13E
 O/s shares (mn)             289        289      289          289          289        Net cash from
                                                                                                                   15,773       34,636     36,139     34,334     37,491
 Fully diluted shares                                                                 operating activities
                             289        289      289          289          289        Net cash used in inv
 (mn)
                                                                                                                     4,016    (53,085)    (4,893)   (41,695)    (32,070)
                                                                                      activities
 Per share (Rs)
                                                                                      Net cash used in fin
 EPS                        42.2       86.5      80.9         90.9        106.4                                    (3,704)          42    (7,142)    (3,592)     (3,592)
                                                                                      activities
 FDEPS                      42.2       86.5      80.9         90.9        106.4       Net increase/Decrease
 Cash EPS                                                                                                          16,085     (18,408)     24,103   (10,953)      1,828
                            66.6      115.0     114.3        130.6        150.9       in cash
 Book value                308.8      395.0     465.3        547.4        644.5       Cash at beginning of
                                                                                                                    3,305      19,390        982     25,086      14,132
 DPS                                                                                  the year
                              3.5       6.0       7.5          7.5          8.0
 Valuation (x)                                                                        Cash at end of the year      19,390         982     25,086     14,132      15,961
 P/E                        28.3       13.8      14.8         13.1         11.2       Source: Company, Fortune Research
 Price/Book value             3.9       3.0       2.6          2.2          1.9
 EV/Sales                     1.5       1.0       0.8          0.7          0.5
 EV/EBITDA                  17.5        7.6       7.9          6.7          5.3
 Profit ratios (%)
 RoE                        14.4       24.6      18.8         18.0         17.9
 RoCE                       13.0       22.2      17.5         17.2         17.3
 Leverage ratio
 Debt/Equity (x)              0.1       0.1       0.0          0.0          0.0
 Net debt/Equity (x)        (0.3)     (0.4)     (0.4)        (0.4)        (0.5)
Source: Company, Fortune Research




                                                                                                              Maruti Suzuki                                       4
                                                                                                                                                        Fortune Group 
  
                                                                      Investment ratings (Returns)
Buy (>10%)                                                           Hold (-10 to 10%)                                             Sell (<-10%)
  
  

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                                                                                                                    Maruti Suzuki                                                5

				
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