Maruti Suzuki India Limited - Better cycle ahead...! - Antique

Maruti remains the best directional play in the sector. Going into FY15/16, we are fairly certain of better times for the company - industry upcycle on a low base coupled with market share gains in the SUV segment (post the XA-Alpha launch). Margin improvement would be aided by resultant operating leverage coupled with localisation benefits. Besides the cost savings, reducing dependence on forex volatility will be a very strong re-rating catalyst for the stock. We aren't too perturbed about the current sluggishness in volumes, as street estimates have been hacked down proportionately. Reiterate Buy!

FY14: Almost discounting bear case

We expect the next couple of quarters to be painful. For FY14, we are building in a ~4% volume decline (adjusting for the strike in FY13, this translates into a ~9% YoY volume decline). Besides higher discounts (currently at all-time high levels), we expect adverse currency on indirect imports to impact margins next quarter. Hence, we assume EBITDA margins to taper to 11.7% in 2HFY14 from 12.6% in 2Q.

Still the best directional play in the sector

We are fairly certain that FY15/16 will be strong years for Maruti - industry upcycle on a low base coupled with market share gains in the SUV segment (post the XA-Alpha launch). Our FY15 volume growth estimate (17%) implies an FY12-15 volume CAGR of a modest 5%. Margin improvement would be aided by resultant operating leverage (they have deferred the second phase of their diesel expansion in Gurgaon and also have the flexibility to rejig their contract with Fiat) coupled with localisation benefits. Imports have fallen to 20% at present from 26% of sales in FY12. Notwithstanding further havoc in the currency, this is on course to reduce to 17%/14%/10% in FY14/15/16. Besides the cost benefits, we expect rising localisation to be a strong re-rating catalyst for the stock.

Peak competitive pressures waded-off very well...

Maruti has withheld competitive pressures (peak, in our view) extremely well thus far. Besides further refreshes in the small car space, we now have high hopes from the upcoming XAAlpha SUV (to be launched end-FY15), as it increases Maruti's presence in a fast growing/relatively untapped UV segment. This will more than offset any probable market-share loss in small cars.

An excellent two-year play... Reiterate Buy!

Maruti is reducing its vulnerability to forex fluctuations, waded of peak competitive pressure pretty well and its well balanced fuel-mix makes it a good hedge against any major volatility in fuel prices. Clearly, it is the best way to play the eventual up-cycle in the car industry. We acknowledge some pain for another quarter or so, while reiterating BUY (target price INR2,160 @12x FY15e Cash P/E). On conservative FY15 estimates, the stock trades at a P/E | Cash P/ E | EV/EBITDA of 15.2x | 10.0x | 7.3x - very attractive, given the earnings growth potential.

Source : Equity Bulls

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