Maruti Suzuki - Auto loans move not major, but a risk at the margin - Centrum

We retain Buy on MSIL with TP of Rs1,641. Interaction with car dealers reveals that SBI, a major auto financier has increased minimum income requirements for availing of car loans to Rs0.6mn/p.a from Rs0.25-0.3mn earlier. We believe this is SBI specific as it claims to be a pro-active step to improve the quality of its retail portfolio. It could also be an attempt to control delinquencies, given the weak macro environment (as in 2012). Given the finance options available to customers from other large private and public banks, this move by SBI is unlikely to have any significant impact on car sales. But, if other banks follow suit and liquidity freezes for those in below 6lac p.a income bracket, sentiments and demand will be impacted as ~60% of cars bought are financed.

May not change buying decision: SBI currently offers the lowest rate at 10.45%. A comparison indicates that rates charged by private banks are higher by 50-100bps while those by other PSUs 5-50bps. We believe higher lending rates are unlikely to influence the buying decision of consumers as the impact on monthly EMI is not significant. Pre-payment penalty charges by private banks and advance EMI vs. waiver by PSUs can have some impact. Dealers are now increasingly pushing consumers to opt for finance from other PSUs whose lending rates and other terms remain the same.

Move SBI specific, others unaffected: SBI, a major auto financier has more than doubled the minimum income requirements for availing of car loans to Rs0.6mn/p.a from Rs0.25-0.3mn/p.a earlier. We believe this is SBI specific as it claims to be a pro-active step to improve the quality of its retail portfolio. It could also be an attempt to control delinquencies, given the weak macro environment (similar to what it had experienced in 2012). In Jan 2012, it increased the income limit from Rs0.1mn p.a. to Rs0.25mn p.a. Dealers see limited possibility of other banks following suit.

MoM trend turns positive in August'13: MSIL has registered overall sales of 87,323 units for August '13 reversing the negative MoM trend from April'13 and registering a growth of 5%MoM and 61%YoY (albeit on a low base due to production issues at Manesar plant in August'12). We remain conservative in our FY14E volume estimates and build a decline of 2% vs. management guidance of 2-4% volume growth (and YTD growth of 1%). While the expectation on FY15E recovery is low, we see multiple tailwinds of pent-up demand, new model cycle, and consumer preference shifting back to petrol cars.

Valuations and risks: At the CMP of Rs1,249, the stock trades at 12.9x/11.3x FY14E/FY15E EPS. We retain Buy with a TP of Rs1,641 (based on 16x FY15E Core EPS + Cash per share of Rs260 + Rs7 of subsidiaries). Valuations at P/E of 11.3x FY15E EPS (25% discount to 5yr historical average) look attractive. Key risks are, 1) Unfavorable Fx (higher than expected INR depreciation or lower than expected weakening of Yen to USD 2) High inflation leading to sharp monetary tightening pushing car demand recovery beyond FY15 and 3) Failure of new launches.

Source : Equity Bulls

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