Stock Market Result Update on Maruti Suzuki for 2QFY2012

Stock Market Result Update on Maruti Suzuki for 2QFY2012 with an Accumulate recommendation and a Target Price of `1190 (12 months).

Maruti Suzuki’s (MSIL) 2QFY2012 results were significantly below ours as well as consensus estimates due to a sharp decline in its operating margin. The company’s operating margin witnessed a significant contraction on account of negative effects of operating leverage, higher discounts; high commodity cost and increased other expenditure. We revise downwards our EBITDA margin estimates to factor in 1) poor operating performance in 2QFY2012 and 2) impact of Yen appreciation on vendor imports leading to higher raw-material cost in 3QFY2012. Consequently, we have revised our earnings estimates downwards by 14.8%/5.7% for FY2012E/13E. However, we maintain our Accumulate rating on MSIL, as we believe MSIL will be the prime beneficiary of revival in demand post the likely easing of interest rates in CY2012.

Labor problems, appreciating Yen and higher other expenses affect performance: MSIL reported an in-line decline of 14.4% yoy (8.2% qoq) in its net sales to `7,832cr mainly due to lower volumes (down 19.6% yoy and 10.4% qoq) led by slowdown in passenger car demand and strike at the Manesar facility. Average net realization grew by 4.8% yoy (1.1% qoq) due to price increases and higher share of diesel car sales. EBITDA margin witnessed a steep 419bp yoy (324bp qoq) decline and stood at dismal 6.3% due to lower volumes, higher discounts and high commodity costs – ~`26cr of mark-to-market (MTM) loss on commodity hedges and other expenditure. Higher other expenditure was on account of Yen appreciation (MTM loss on royalty payments of ~`100cr), higher promotional expenses (new Swift being launched) and higher other manufacturing expenses. As a result of disappointing operating performance, net profit fell substantially by 59.8% yoy (56.2% qoq) to `240cr. Higher depreciation expense and lower-than-expected other income also impacted MSIL’s bottom-line growth. 

Outlook and valuation: We continue to remain positive on long-term volume growth in the passenger car industry, driven by economic growth and low penetration levels in the country. At `1,126, MSIL stock trades at 13.2x FY2013E earnings. We maintain our Accumulate rating with a target price of `1,190.