Maruti Suzuki - Event update - Merger with SPIL - Angel Broking

Maruti Suzuki (MSIL) is set to merge its associate company, Suzuki Power Train India Ltd. (SPIL), with itself subject to necessary legal and regulatory approvals. SPIL, a 70:30 JV between Suzuki Motor Corporation (SMC), Japan, and MSIL manufactures and supplies diesel engines and transmission components for vehicles. SPIL currently supplies ~90% of its production to MSIL. For FY2012, SPIL posted net sales of Rs.4,551cr (13% of MSIL), EBITDA margin of 12.1% and PAT margin of 2.5% (lower due to higher depreciation costs, ~9% of net sales).

Key highlights of the deal: The merger will be effected through share swap in the ratio of 1:70, one share of MSIL for every 70 shares of SPIL, and there will be no cash outflow from MSIL. As per the deal, MSIL will issue 1.317cr fresh shares to SMC in lieu of SMC's 70% stake in SPIL. Consequent to the merger, SMC's shareholding in MSIL will increase to 56.2% from 54.2% currently. Also, MSIL's equity will dilute by 4.6% with the issuance of fresh shares. Based on yesterday's closing price of MSIL's shares, the deal has been attractively valued at 4.6x EV/EBITDA (FY2012 basis).

Merger to be positive in the long run: We believe the merger of SPIL with MSIL is positive for MSIL given that MSIL itself is setting up a new diesel engine facility (capacity of 300,000 units by FY2014) in Gurgaon. Further, with increasing trend of dieselization, the integration of SPIL will result in better control over diesel engine sourcing, provide flexibility in production planning and meeting the fluctuations in market demand. Additionally, single management control of diesel engine operations will result in better sourcing, localization and cost-reduction measures.

Outlook and valuation: We retain our estimates for MSIL and do not factor in the effect of merger on MSIL's financials as we wait for the detailed financials of SPIL. We expect MSIL to be the key beneficiary of reversal in interest rate cycle going ahead and expect EBITDA margin to improve by ~250bp over the next two years, mainly on account of currency hedging, operating leverage and better product mix. At Rs.1,146, the stock is trading at 11.4x its FY2014E earnings. We recommend a Buy rating on the stock with a target price of Rs.1,510. A steep increase in excise duty on diesel vehicles poses a key risk to our volume estimates.

Source : Equity Bulls

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