Maruti Suzuki - "Too much uncertainty, Downgrade to Underperformer" - LKP Research

Q1 FY 13 results a tad above our expectations

In Q1 FY13, Maruti's volumes increased by 5%, while realizations grew by a huge 22% yoy and 13.7% qoq on improvement of product mix, as diesel vehicles contributed higher than the petrol vehicles as petrol prices were on a strong upmove. Despite this, net sales degrew sequentially by 8.3% as volumes fell by 18%, while on a yoy basis, net sales jumped by 27%. RM cost to sales showed a sharp decline qoq from 81.3% to 79.7%, and from 79.9% yoy. This was with softening of input costs though yen movement vis-à-vis rupee was strong. On the other hand, employee costs to sales moved up slightly to 2.3% from 2.2% yoy and qoq, while other expenses grew handsomely to 12.9% of sales from 10.5% yoy and 11.1% qoq as discounting grew on petrol models (~10-12% of sales on Alto and Wagon R models) and royalty expenses grew to 6% of sales from 5.1% qoq and 4.8% yoy due to yen appreciation. Hence, EBITDA margins were just 10 bps higher qoq at 7.5%, while down by 240 bps yoy from 9.8%. Other income also declined by 39% yoy to Rs 1.12bn, while interest costs moving up by 59% qoq and >4x yoy to Rs 331mn which indicates possible short term loans raised for funding capex as cashflows are under stress.

Uncertainties to have an overhang on the stock

We are uncertain about the ongoing strike at Manesar plant as the production doesn't seem likely getting back on track in the near term. This is leading to a daily loss of 2,000 units of vehicles and Rs 90cr in value terms. Extension of the same will lead to heavy volume cuts for FY 13. In 1Q, the volumes grew by just 5% as petrol portfolio declined severely, while diesel vehicles were the only saving grace. However, with the strike happening at the diesel car manufacturing plant, the impact going forward will be intensified on volumes as well as profitability front. We expect Q2 to be badly hit due to this and second half to be good provided the company arrives at some solution on the Manesar lockout. This cue will be one of the main deciders for the volume forecast for FY 13E. Currently we estimate volumes for FY 13E/14E to grow at 5.7%/10% including exports. Additionally, there will also be a delay in the delivery of benefits from the SPIL merger as the engine manufacturer is also shutdown at Manesar plant. Furthermore, we have our reservations regarding the hike in employee costs and depreciation post SPIL merger, which makes us less sanguine about the merger prospects.

Margins to get impacted further in FY 13, while FY 14 may see some improvement

The shutdown at Manesar along with higher discounting on petrol models will lead to a margin cut in FY 13E. Yen uncertainty is another overhang on the margins as the company has hedged only 60% of its yen exposure. In FY 14E, however, we positively expect labor issues to settle down and diesel engine supply improves, thus providing a leeway for margins to improve. Demand also may return back with diesel cars offsetting higher discounts on petrol cars and expectations of interest rates getting cut in medium term. This coupled with softening of raw material may help the company to improve margins. We expect 8.7% and 9.9% margins in FY 13E and FY 14E respectively.

Outlook and Valuation

Considering the uncertainty with lockout at Manesar plant, we are cutting down our FY 13E estimates for volumes as well as margins. Uncertainties surrounding Yen appreciation, slowdown in overall demand, increasing discounts would in our view impact FY 13 earnings. We hence look at FY 14E to be a better year for both margins and volumes and now value the company on FY 14E. However, we believe that the company with slower growth and higher capex outlook will attract a lesser valuation multiple. We therefore value the stock at 13x times FY 14E earnings of Rs 86.4 and arrive at a target price of Rs 1,123, which gives a flattish upside from current levels lower than our previous target of Rs 1,183. Hence we downgrade the stock from Neutral to Underperformer.

Source : Equity Bulls

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