Maruti Suzuki - Margin recovery to continue; Maintain Buy - Centrum

Maruti Suzuki's (MSIL) 3QFY13 operating results were lower than our expectations with EBITDA margins at 8% compared to our estimate of 8.8%. Higher than expected realization growth (up 5.5% QoQ vs. est. 3%) led to higher revenue growth. However, higher than expected other expenditure (at 11.7% of sales vs. est. 9.4%, largely on account of impact on vendor imports) led to lower than expected operating performance. Despite 3QFY13 weaker than our expectations, we continue to be positive on the stock and maintain Buy rating with a target price of Rs.1,814. We expect EBITDA margins to improve further. Our recent interaction with dealers revealed renewed interest for the petrol models in recent months.

Operating performance lower than estimates: Revenues stood at Rs.112bn compared to our estimate of Rs.110bn. While domestic realization registered a growth of 3.8% QoQ, exports grew 20% QoQ, leading to blended realization growth of 5.5% QoQ. Lower EBITDA margins due to the impact on vendor imports (interaction with management indicated 200bps impact) led to lower than expected operating performance. Reported PAT stood at Rs.5bn compared to our estimate of 5.7bn.

Management interaction: Key highlights: 1) Increase in domestic realization by 4% (in our assessment 1-1.5% due to lower discounts as indicated earlier and 2.5%-3% on account of better product mix) 2.) Sales of diesel vehicles stood at 107k units (40% of domestic volumes) in 3Q compared to 70k in 2Q and 100k in 1Q. 3.) Export revenues stood at Rs.13.2bn (12% of revenues) and export realization for the quarter moved up by 20% 4.) Discount for the quarter, was lower by ~Rs.3,000 at Rs.12,000 compared to Rs.15,000 in 2Q. 5.) Impact on account of vendor imports at 200bps is likely to reverse in 4Q due to favorable currency movement in 3Q. 6.) Our dealer interaction indicates strong demand pull for petrol models in recent months.

Valuations and Recommendations: At the CMP of Rs1603, the stock trades at 15.3x FY14E EPS of Rs105 and 12.8x FY15E EPS of Rs125. We continue to maintain Buy rating on the stock with a revised target price of Rs1,814.

Source : Equity Bulls

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