Maruti Suzuki - Q3FY14 Update, CMP Rs.1650, Maintain Hold, Target Increased to Rs.1701

Maruti Suzuki India Ltd. - CMP Rs.1650, Maintain Hold, Target Increased to Rs.1701

Maruti Suzuki India Ltd. (MSIL) has reported strong set of numbers exceeding our & street expectations for Q3FY14 but agreement with SMC impacted sentiments. The key highlights of the call are summarized as below:

- Sales de-grew by 2.7% whereas EBIDTA & PAT grew YoY by 52% & 36% respectively whereas QoQ it registered a growth of 4.1%, 2.5% & 1.6% respectively. EPS for the quarter came in at Rs.22.6 vs Rs.22.2 in Q2FY14 & 17.4 in Q3FY13. Average realization contracted QoQ due to weaker product mix (lower contribution from diesel cars), lower export volume and consequent high discounts.

- EBITDA margins came in at 12.4% in Q3FY14 vs 12.6% in Q2FY14 & 8% in Q3FY13. Higher localization, favourable foreign exchange and cost reduction initiatives by the company contributed significantly to net profit.

- Volumes saw a YoY de-growth of 4% & a QoQ growth of 4.6% respectively. Rural demand strong with YTD growth of 18% accounting for 30% of business. Discounts at all time high at Rs. 19500/vehicle in Q3FY14 vs Rs.17500 in Q2FY14.

- Gujarat Capex: - MSIL board approved the capacity expansion at Gujarat through a 100% Suzuki subsidiary. This subsidiary would function as a contract manufacturer for MSIL.

Few Clarifications: - (1) Cost of production from Gujarat plant will include royalty which would be exactly the same what MSIL pays. No double accounting of royalty. (2) Gujarat plant will act as zero profit center for SMC except amount retained for future capex. (Cost + adequate cash (net of all tax) to cover incremental capex). Rather SMC to benefit via MSIL being 56% stakeholder. (3) Total control is in the hands of MSIL for product selection and volume off take. (4) No limitation for exports for MSIL and would continue exporting from Gujarat plant under Suzuki tag. (4) Gujarat capex related benefits will be passed on to MSIL (5) No provision for merger in future of Gujarat plant with MSIL. (6) Gujarat plant will be a fully fledged plant except that initially engines will be supplied from Manesar, but eventually would be produced at Gujarat. (7) Contract tenure is 15 years which is further extendable.

Benefits to MSIL:

* Asset light volume expansion should spur ROCE significantly.

* Now-a-days in a competitive business environment capital commitment is not just required for Capex but also for R&D and distribution. MSIL has Rs. 7500 crs cash. This plus future cash from operations and interest saved on Capex would be used for strengthening R&D and marketing and distribution reach. This would put MSIL in a very strong foothold with formidable capacities at one end and unmatched distribution network at the other.

OUTLOOK & VALUATION

MSIL came out with strong set of numbers on the margin front in Q3FY14. However, given the given the arrangement with SMC the stock took an initial beating. Though at the first sight this arrangement has all the looks of a corporate governance issue, we believe it is an excellent proposal. Even though it would dilute margins operationally but at PBT level, impact should be limited & should also help bolster cash-flows. We marginally tweak our FY14E & 15E estimates factoring in lower volumes (citing slower than expected revival in the PV market) while we upgrade our EBITDA margin estimates (citing benefits from cost reduction measures & increasing localization). We continue to recommend a HOLD on the stock with a revised price target of Rs.1701 (based on 16x FY15E EPS of Rs.106.3) maintaining our optimistic view on the company with its ever expanding rural presence, strong network & new upcoming product launches.

Source : Equity Bulls

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