Maruti Suzuki - Volumes to drive growth further - Reliance Securities

Key highlights of the result

- Volumes back to normal level: Maruti's Net Sales grew ~50% qoq and increased 16.5% yoy to Rs11,486cr. The company's production returned to normal levels after being disrupted in 3QFY2012. Volumes were up 50.4% qoq and 4.9% yoy to 360,334 units. However, Average Realized Price (ARP) increased a whopping ~11% yoy, while, it was flat qoq.

- EBITDA margin increased from lows: Higher volumes and cost control led EBITDA margin to increase ~210bp qoq to 7.5%, though it was lower than our expectations (~8%). However, higher discounts on petrol models (5-6% higher than 3QFY2012) and adverse currency movements limited EBITDA margin expansion. On a yoy basis, EBITDA margin was low due to an increase in raw material costs and employee costs.

- Other income led to a spurt in PAT: Maruti's other income increased 85.1% qoq and ~148% yoy to Rs297cr on account of maturity of some fixed maturity plans. On a qoq basis PAT posted three-fold increase to Rs640cr in 4QFY2012, while, it was down 3% on a yoy basis.

Outlook and Valuation

Maruti's result was mixed with top-line marginally better than expected and margins falling short of expectations. Further, Management has given a volume growth guidance of ~10% for FY2013E, considering the challenging domestic economic environment. However, we believe that the guidance is conservative, given that the company has seen a volume dip in FY2012, and lost market share. Ramp up of its diesel car engine capacity from ~250,000 to ~400,000 units pa is likely to boost growth prospects of the company. Further, recently launched Ertiga saw bookings of ~22,000 units in less than a month. This is expected to have a huge positive impact on the company's topline.

We expect easing of interest rates in 1HFY2013, which will positively impact the demand scenario going forward. Moreover, we anticipate the company's EBITDA margin to improve over the next 2-3 quarters with strong volume growth. We expect top-line and bottom-line to grow at a CAGR of 23% and 35% over FY2012-FY2014E respectively. We had upgraded Maruti in our previous update (January 24, 2012). Since then, the stock has appreciated ~20% to surpass our target price. We are now rolling over to FY2014E estimates, which gives us a target price of Rs1,550, indicating an upside of ~11% from the current levels. Thus, we recommend an Accumulate on the stock.

Risks to the view

- Slowdown in demand could hamper the growth prospects of the company
- Higher competition can impact the demand or reduce profitability
- Continued high interest rates can affect the demand
- Significant increase in raw material costs can impact profitability
- Further labor unrests can impact company's performance.

Source : Equity Bulls

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