Maruti Suzuki India - Initiating Coverage - Sushil Finance

Balanced Portfolio of Petrol & Diesel Models - to Provide Margin of Safety

MSIL gave a strong comeback in FY13 with a market share gain of 1% (total volume growth of 3.33% vs. Ind. 3.27%) led by strong portfolio of diesel cars in the passenger car segment (Swift & Dzire) and the launch of Ertiga in the Utility Vehicle segment. MSIL is investing close to Rs.18 bn to increase its in-house diesel engine capacity by 300,000 of which 150,000 is likely to come on-stream by Q3FY14E & balance in FY15E. The expansion in diesel engines would help the company to bring down long waiting period for its popular models. We believe, the narrowing gap between petrol & diesel coupled with declining petrol prices would augur well for the company as it has a strong hold in the price sensitive mini segment (market share 75%) which is primarily petrol driven. We expect MSIL's volume to increase at a CAGR of 6.3% over FY13-15E led by increased capacity of diesel engines & setting up of new assembly plant (capacity 250,000 likely by Q3FY14E). However, we are not factoring any incremental volumes that may accrue on account of new product launches which leaves sufficient room for outperformance.

Yen Appreciation Coupled with Localization - to Aid Margin Expansion

MSIL's cumulative Yen exposure stands at ~20% (direct + indirect excl. royalty - as a percent of total raw material cost) down from 26% in FY12 led by increased localization and depreciating yen. With SPIL merger, Royalty which currently stands close to 5% (of sales) is likely to increase to ~5.5%. The company has hedged ~30% of its total exposure at USDJPY 95. It has also guided for increased localization in the coming years which will help reduce the import content going forward. We are factoring in JPYINR at 0.57 & 0.54 in FY14E & FY15E, coupled with likely benefits from localization; we expect import content to reduce to ~15.2% by FY15E from current levels of ~20%. We thus expect company's operating profits to increase by 25.6% CAGR over FY13-15E with margin expansion of ~285 bps during the same period.

New Product Launches & Initiatives - to help expand market share

MSIL is planning to launch revamped versions of its existing models viz. Wagon R, Alto K10 & Grand Vitara and certain new launches that would replace some of the existing non-performing models viz. Estilo, Astar & SX4. It is also developing an 800-cc two cylinder diesel engine for its small cars that is likely to debut in the Indian markets by FY16E. MSIL has recently announced its foray into LCV segment codenamed Y9T which will be based on its new 2-cylinder 800-cc diesel engine to compete with Tata Ace. The first LCV is likely to roll out from its Gujarat plant by FY16E. New product launches coupled with foray into newer segments will help Maruti expand its market share from current 39% & would also aid volume growth.

Strong Financials, Improving Return Ratios & Robust Cash flow Generation

We expect MSIL's revenues & PAT to increase at a CAGR of 10.4% & 26.6% over FY13-15E led by higher diesel sales & margin expansion. It has a healthy balance sheet with 'net-debt free' status & cash reserves to the tune of ~Rs.60 bn (Rs.199/share) as on FY13 which is likely to increase to ~Rs.93 bn by FY15E (Rs.307/share) as we expect the company to generate strong cash flows to the tune of Rs.49.9 bn & 63.2 bn in FY14E & FY15E which is adequate to fund its future capex of ~Rs.30-35 bn each over the next 2 years. Moreover, its RoE & RoCE are likely to expand from the current levels of 14.2% & 12.9% to 16.5% & 17.7% respectively. Healthy balance-sheet, strong operating cash-flows coupled with improving return ratios not only provides better financial stability but also supports ongoing expansion plans of the Company.

OUTLOOK & VALUATION

MSIL is best placed to benefit from increased dieselization in the country. Nevertheless, it has adequate capacity to suffice incremental demand for petrol vehicles. With all the odds favoring MSIL like Yen depreciation, SPIL merger, localization, sustained demand for its products despite slowdown & better acceptability of new products, we believe the best is yet to come for the company. Also, Suzuki's thrust on its Indian subsidiary for its overseas expansion augurs well with the company's strategy to expand its exports to 15% from current 10%. Hence, considering the above investment arguments & strong growth potential (FY13-15E Revenue & PAT CAGR of 10.4% & 26.6%), we recommend an ACCUMULATE on the stock with a price target of Rs.1918 (based on 15x FY15E EPS). At the CMP of Rs.1649, the stock is trading at 15.6x & 13.0x its FY14E & FY15E EPS of Rs.105.4 & Rs.126.9 respectively.

Source : Equity Bulls

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