Buy Maruti Suzuki - Motilal Oswal

Maruti Suzuki (MSIL IN; Mkt Cap USD7.3b, CMP Rs1,191, Buy)

Maruti-Suzuki's operating performance for 1QFY11 disappointed us. EBITDA margin was 10.4% (v/s our estimate of 12.1%), impacted by higher raw material cost and increase in royalty. Further, lower other income further impacted recurring PAT, which was Rs5.12b (v/s our estimate of Rs7.06b).

Highlights

- Volumes grew 25% YoY (down ~1.4% QoQ) to 283,324 units. Realizations improved by 1.6% YoY (down ~0.8% QoQ). Export realizations declined 17% YoY and 8.4% QoQ.

- EBITDA margin declined 280bp QoQ (~180bp YoY) to 10.4%, driven by 180bp QoQ (~160bp YoY) increase in raw material cost and 90bp QoQ (~40bp YoY) increase in other expenditure due to 180bp QoQ increase in royalty.

- PAT grew 12.2% YoY to Rs5.12b, restricted by higher depreciation and lower other income.

- The impact of higher raw material cost is likely to taper off in 2HFY11, as the benefit of currently soft commodity prices is realized.

Downgrading estimates: We are downgrading our EPS estimates by 13% to Rs80.4 for FY11 and by 11% to Rs97.6 for FY12 to factor in higher royalty. It would result in structural downward shift in profitability and return ratios. The stock trades at 12.2x FY12E standalone EPS and 11.3x FY12E consolidated EPS. We maintain Buy, with a target price of Rs1,417 (~10x FY12E cash EPS – median cash P/E since listing).

Source : Equity Bulls

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