Maruti Suzuki India - PINC Result Review

A 'Royal'ty Shocker

An unexpected increase in the royalty payment by Maruti Suzuki (MSIL) led to a 20% decline in Q1FY11 net profits to Rs465mn. The company has hiked royalty and technology fees to its parent Suzuki from ~3.4% to 5.1%. Post this, we revise our FY11 and FY12 earnings estimate downwards by ~20% each.

Outlook: While maintaining our volume estimates for FY11 and FY12, we have reduced margin estimates by 200bps each to reflect the change in policy on royalty payments. As a result, our earnings estimate for FY11 and FY12 have reduced by ~20% each. FY11 and FY12 earnings estimates are at Rs75.3 and Rs87.8 respectively.

VALUATIONS AND RECOMMENDATION

The stock is currently trading at 15.5x its FY12 earnings estimate. We downgrade the stock to a 'HOLD' with a target price of Rs1,405 discounting FY12E earnings 16x.

Source : Equity Bulls

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