Maruti Suzuki - Margins to improve, but premium valuations; Sell - Anand Rathi

Vehicle sales lower. Maruti Suzuki's 3QFY14 sales volume was weak, as it declined 4.4% yoy to 288,151 units. We expect it to grow 2.4% in FY14 against 3.3% in FY13, yoy. In early Jun'13, the company had to control production at its diesel plant, which till last year was running at full utilisation. We estimate residual growth of 7.5% for the rest of the year.

Decent results expected. We expect 1.8% yoy revenue decline (4.4% volume decline and 2.5% growth in realisations) to Rs. 110.03bn. Our EBITDA margin expectation is 12% (up 400bps yoy, 60bps lower qoq). Our EBITDA growth estimate is 47.5% and our profit growth estimate is 38.6% yoy, to Rs. 6.9bn. Profit growth in 3QFY14 is also inflated due to Suzuki Powertrain merger in 4QFY13, which has not been accounted for in the base for 3Q.

New lines onstream. The new diesel engine plant at Gurgaon and the third assembly facility at Manesar went on stream during Jul-Sep'13. With this, capacity for vehicle assembly is now 1.5 million vehicles per annum.

Our take. In FY14, a favourable exchange rate and low base for its vehicle sales would benefit the company. Most carmakers are looking to increase prices 1-2% in Jan'14 to compensate for increasing input costs, higher overheads and the impact of a depreciated rupee. Nevertheless, headwinds from curtailed demand for passenger cars and from launches by competitors would be the rough road in the next two quarters. We believe the price factors in the short-term positives, while possible downgrades in sales estimates have not yet been fully captured. Even the pick-up in exports is not likely in the near term. Hence, we retain a Sell, with a target of Rs. 1,476. Our target price is based upon 13.5x FY15e EPS. At CMP, the stock trades at 16.2x FY15e EPS. Risks. Above-expected volume growth, currency-related benefits, lower commodity costs, possibility of stake increase by Suzuki.

Source : Equity Bulls

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