Diving deeper intoMaruti after extensive channel checks–following factors to play outover the next few years a) favourable model cycle (62%/50% incremental volume in FY15/FY16 from new models); b) meaningful margin uptick from better utilisation and ~1/6th reduction in weighted average discount on mix change without lowering existing discounts (~15% volume from non-discounted models), and c) high success probability of new launches. We, thus, upgrade FY16 earnings by ~6% by conservatively modeling these factors with room for further upgrade. Upgrade MSIL to BUY on structuralbusiness changes and earnings visibility.
20% volume growth in FY16 tells you half the story. We estimate Maruti’s FY15/FY16 volume to increase by ~13%/20% YoYof which new modelsto contribute~62%/50% of the incremental volume.We are building in volumes of new models (Ciaz/S-Cross/Xa-Alpha) based on feedback from dealers and Maruti’s vendors’. We are factoring only 5%/10% growth in existing base models during FY15/FY16 which can surprise positively on broad base demand recovery.
- Our confidence on demand recovery is based on channel checks which suggest 1)Return of first time buyer after 3-yrs, 2)10-15% YoY jump in walk-in enquiries/conversions, 3) lowering of retail conversion time (~30 days from ~40-45 days for a walk-in customer). Also, we believe Maruti’s entry into new segments a) Sedan (180k pa units), b) Crossover/entry level SUV (150k pa units) and c) 1-1.5t LCV segment (~150k pa units) will be a key volume/revenuedriver.
Skeptisicm on success of high priced models is unwarranted. We believe street’s skepticism on MSIL’s high priced models is exaggerated as company has learnt from fading of its SX4 model after initial success due to a) lack of regular upgrade; and b) absence of advanced features/interiors compared to competitor models. We believe company have/will avoid these mistakes along with creation of separate sales force and studio showrooms for higher priced models.
- Fable on Maruti being unsuccessful in high priced models will also go away as we expectlarge proportion of exchange buyers (1/3rd of Maruti’svolume) from existing Swift/Dzire/Ertiga customers’(~2.5mn existing customer base) upgrade.
Discounts to be lower on mix change.Our calculation indicates that Maruti’s average discounts to come down by ~16% without lowering what they are shelling out now on account of mix change.Maruti has recently reduced their discounts by ~Rs3k/unit which will bring down its average discounts to ~19k/unit from 21k in 1Q. We believe room for further lowering of discounts exists, although it may unlikely to go back to ~9k level in FY10 on account of a) growing discounts on diesel models, b) growing competition in the compact segment, and c) aging of its volume models like Alto,WagonR, Ritz etc
JPY can be an angel to margins. JPY has depreciated ~4.5% in the last one month,which augurs well to its margins as 1% depreciation in Yen improves Maruti’s margin by ~18bp. Hence, if current INR/JPY rate persists it can improve Maruti’s EPS by ~8% in FY16 being other variables constant. Further, yen depreciation coupled with ~Rs3k reduction in discounts will improve MSIL’s earnings by ~13%, which we haven’t yet factored.
Upgrade to BUY; Earnings upgrade to continue. We clearly see positive triggers (volume/mix/margin/discount/currency) for MSIL playing out over the next 2-3 years.We raise our TP to Rs3,430/share from Rs2,583 based on 20x FY16E earnings as improved earnings visibility will see multiplesexpand.
Scenario analysis for stock price based on FY17E earnings: Discounting FY17E EPS by 18x, MSIL’s per share value comes in at Rs4200 without factoring in yen depreciation (4.5%) and lower discounts (Rs3k/units).If we factor both currency and discounts, MSIL’s per share value turns out to be Rs4,665 on +11% earnings impact in FY17E because of both.
BUY
MSIL IN| CMP RS 3085
TARGET RS 3430 (+12%)
Company Data
O/S SHARES (MN) : / 302MARKET CAP (RSBN) : / 932
MARKET CAP (USDBN) : / 15.3
52 - WK HI/LO (RS) : / 2980 / 1334
LIQUIDITY 3M (USDMN) : / 16.5
FACE VALUE (RS) : / 5
Share Holding Pattern, %
PROMOTERS : / 56.2FII / NRI : / 22.5
FI / MF : / 13.6
NON PROMOTER CORP. HOLDINGS : / 5.5
PUBLIC & OTHERS : / 2.2
Price Performance, %
1mth / 3mth / 1yrABS / 10.6 / 23.9 / 117.0
REL TO BSE / 9.2 / 18.7 / 82.8
Price Vs. Sensex (Rebased values)
Source: Bloomberg, PhillipCapital India Research
Other Key Ratios
Rs, mn / FY14 / FY15E / FY16ENet Sales / 426,448 / 502,634 / 620,626
EBITDA / 50,959 / 62,821 / 83,223
Net Profit / 27,830 / 35,840 / 51,573
EPS, Rs / 92.1 / 118.6 / 170.7
PER, X / 33.5 / 26.0 / 18.1
EV/EBIDTA, x / 18.5 / 14.7 / 10.5
EV/Net Sales, x / 4.4 / 3.9 / 3.3
ROE, % / 13.3 / 15.0 / 18.5
Debt/Equity (%) / 8.7 / 7.6 / 6.5
Source: PhillipCapital India Research Est.
Dhaval Doshi (+ 9122 6667 9769)
Priya Ranjan (+ 9122 6667 9965)
Please refer to Disclosures and Disclaimers at the end of the Research Report.
Maruti’s product volume shareShare of new products
Source: PhillipCapital India Research
Share of non discounted modelsMaruti’s discounts trends
Source: PhillipCapital India Research; * FY16 discounts is calculated based on no discount reduction in existing levels fro Q1FY15
INR JPY movementEBITDA margin
Source: PhillipCapital India Research
Financials
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Income Statement
Y/E Mar, Rs mn / FY13 / FY14E / FY15E / FY16ENet sales / 426,126 / 426,448 / 502,634 / 620,626
Growth, % / 23 / 0 / 18 / 23
Other income / 9,753 / 10,558 / 11,692 / 13,675
Total income / 435,879 / 437,006 / 514,326 / 634,301
Raw material expenses / -325,590 / -313,488 / -366,420 / -448,713
Employee expenses / -10,696 / -13,681 / -15,833 / -19,239
Other Operating expenses / -57,297 / -58,878 / -69,251 / -83,126
EBITDA (Core) / 42,296 / 50,959 / 62,821 / 83,223
Growth, % / 68.3 / 20.5 / 23.3 / 32.5
Margin, % / 9.9 / 11.9 / 12.5 / 13.4
Depreciation / -18,612 / -20,844 / -22,898 / -23,661
EBIT / 23,684 / 30,115 / 39,923 / 59,561
Growth, % / 72.3 / 27.2 / 32.6 / 49.2
Margin, % / 5.6 / 7.1 / 7.9 / 9.6
Interest paid / -1,898 / -1,759 / -1,559 / -1,359
Other Non-Operating Income / 8,124 / 8,229 / 8,795 / 11,491
Pre-tax profit / 29,910 / 36,585 / 47,158 / 69,694
Tax provided / -5,989 / -8,755 / -11,318 / -18,120
Profit after tax / 23,921 / 27,830 / 35,840 / 51,573
Net Profit / 23,921 / 27,830 / 35,840 / 51,573
Growth, % / 46.3 / 16.3 / 28.8 / 43.9
Net Profit (adjusted) / 23,921 / 27,830 / 35,840 / 51,573
Unadj. shares (m) / 302 / 302 / 302 / 302
Wtdavg shares (m) / 302 / 302 / 302 / 302
Balance Sheet
Y/E Mar, Rs mn / FY13 / FY14E / FY15E / FY16ECash & bank / 16,250 / 6,297 / 28,051 / 80,268
Debtors / 14,699 / 14,137 / 15,889 / 18,685
Inventory / 18,407 / 17,059 / 17,765 / 21,586
Loans & advances / 29,802 / 32,567 / 32,567 / 32,567
Total current assets / 79,158 / 70,060 / 94,273 / 153,106
Investments / 70,783 / 101,179 / 111,179 / 126,179
Gross fixed assets / 198,007 / 227,018 / 247,018 / 252,018
Less: Depreciation / -100,015 / -119,114 / -142,012 / -165,674
Add: Capital WIP / 19,409 / 26,214 / 26,214 / 26,214
Net fixed assets / 117,401 / 134,118 / 131,220 / 112,558
Total assets / 267,342 / 305,357 / 336,671 / 391,843
Current liabilities / 54,833 / 62,715 / 60,185 / 69,152
Provisions / 8,741 / 8,757 / 13,829 / 19,064
Total current liabilities / 63,574 / 71,472 / 74,014 / 88,216
Non-current liabilities / 17,979 / 24,105 / 24,105 / 24,105
Total liabilities / 81,553 / 95,577 / 98,119 / 112,321
Paid-up capital / 1,510 / 1,510 / 1,510 / 1,510
Reserves & surplus / 184,279 / 208,270 / 237,042 / 278,012
Shareholders’ equity / 185,789 / 209,780 / 238,552 / 279,522
Total equity & liabilities / 267,342 / 305,357 / 336,671 / 391,843
Source: Company, PhillipCapital India Research Estimates
Cash Flow
Y/E Mar, Rs mn / FY13 / FY14E / FY15E / FY16EPre-tax profit / 29,910 / 36,585 / 47,158 / 69,694
Depreciation / 18,612 / 20,844 / 22,898 / 23,661
Chg in working capital / -133 / 6,974 / -4,989 / 2,350
Total tax paid / -4,326 / -8,320 / -9,074 / -16,420
Cash flow from operating activities / 44,063 / 56,083 / 55,995 / 79,286
Capital expenditure / -54,692 / -37,561 / -20,000 / -5,000
Chg in investments / -9,309 / -30,396 / -10,000 / -15,000
Cash flow from investing activities / -64,001 / -67,957 / -30,000 / -20,000
Free cash flow / -19,938 / -11,874 / 25,995 / 59,286
Equity raised/(repaid) / 12,822 / 402 / 0 / 0
Debt raised/(repaid) / 1,523 / 4,347 / 0 / 0
Dividend (incl. tax) / -2,517 / -2,828 / -4,241 / -7,069
Cash flow from financing activities / 11,827 / 1,921 / -4,241 / -7,069
Net chg in cash / -8,111 / -9,953 / 21,754 / 52,217
Valuation Ratios
FY13 / FY14E / FY15E / FY16EPer Share data
EPS (INR) / 79.2 / 92.1 / 118.6 / 170.7
Growth, % / 39.9 / 16.3 / 28.8 / 43.9
Book NAV/share (INR) / 615.0 / 694.5 / 789.7 / 925.3
FDEPS (INR) / 79.2 / 92.1 / 118.6 / 170.7
CEPS (INR) / 140.8 / 161.1 / 194.4 / 249.1
CFPS (INR) / 119.0 / 158.4 / 156.3 / 224.4
DPS (INR) / 8.0 / 12.0 / 20.0 / 30.0
Return ratios
Return on assets (%) / 10.3 / 10.1 / 11.5 / 14.4
Return on equity (%) / 12.9 / 13.3 / 15.0 / 18.5
Return on capital employed (%) / 13.3 / 13.0 / 14.6 / 18.3
Turnover ratios
Asset turnover (x) / 4.0 / 3.3 / 3.7 / 4.9
Sales/Total assets (x) / 1.7 / 1.5 / 1.6 / 1.7
Sales/Net FA (x) / 4.3 / 3.4 / 3.8 / 5.1
Working capital/Sales (x) / 0.0 / (0.0) / (0.0) / (0.0)
Working capital days / 2.8 / (3.2) / (2.8) / (6.7)
Liquidity ratios
Current ratio (x) / 1.3 / 1.0 / 1.3 / 1.8
Quick ratio (x) / 1.0 / 0.8 / 1.1 / 1.6
Interest cover (x) / 12.5 / 17.1 / 25.6 / 43.8
Dividend cover (x) / 9.9 / 7.7 / 5.9 / 5.7
Total debt/Equity (%) / 7.5 / 8.7 / 7.6 / 6.5
Net debt/Equity (%) / (1.3) / 5.7 / (4.1) / (22.2)
Valuation
PER (x) / 39.0 / 33.5 / 26.0 / 18.1
Price/Book (x) / 5.0 / 4.4 / 3.9 / 3.3
Yield (%) / 0.3 / 0.4 / 0.6 / 1.0
EV/Net sales (x) / 2.2 / 2.2 / 1.8 / 1.4
EV/EBITDA (x) / 22.0 / 18.5 / 14.7 / 10.5
EV/EBIT (x) / 39.2 / 31.3 / 23.1 / 14.6
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Recommendation Chart
Source: PhillipCapital India Research
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