Sell Maruti Suzuki; target of Rs 820: Deutsche Bank

ALSO READ News and Notices about Maruti Suzuki See interviews with Maruti Suzuki Management See what other Experts & Brokerages are saying about Maruti Suzuki See previous Results of Maruti Suzuki Maruti Suzuki BSE | NSE 25/05/12 Are Mutual Funds betting on Maruti Suzuki?

Deutsche Bank is bearish on Maruti Suzuki and ahs recommended sell rating on the stock with a 12-month target of Rs 820.

 

Deutsche Bank report on Maruti Suzuki:

 

Reiterate Sell with a target price of Rs 820

 

We maintain our Sell on Maruti with a new target price of Rs 820. The stock has had a good run in the last 3 months (price performance of c30%). The drivers were strong monthly sales figures (21% YoY in Apr-Aug'07) in the backdrop of slow industry growth and a strong 1QFY08. Our view is based on four factors: 1) stretched valuations at current price, 2) rising capex intensity due to underinvestment in the past four years, 3) limited scope of further cost-reduction, and 4) competition in the compact car segment.

 

MS has few levers for margin enhancement

 

We forecast Maruti's volumes and revenues to grow at a 3-year CAGR (FY07-10E) of c14% over the next 3 years. Domestic volumes are expected to grow at a slower rate of c10% CAGR (FY07-FY10E) and exports at 55% over the same period. Our estimates are in line with Maruti's target of 1m vehicles by FY2010. Rapid strides in indigenization in the last 5 years have helped MS improve margins in the past - this trend is unlikely to continue further (see inside). Further, we expect MS to trade market share for margins with rising competitive intensity. Overall, we estimate operating margins to fall by 100 bps to 13.3% by FY2010E leading to a 3-year EBITDA CAGR (FY07-10E) of 12.4%.

 

Past under-investment would lead to rise in capex intensity in future

 

Over the last 4 years (FY03-07), Maruti invested Rs 7bn in plant and machinery at its Gurgaon plant against a depreciation of Rs 17bn. During this period, vehicle production increased almost 1.9x from c360,000 to 675,000.

 

Trading at 19x FY09E core EPS

 

Given that non-operating income accounts for c22% of pre-tax profit, we focus on MS's core earnings. This is forecasted to grow at a 3-year CAGR (FY07-FY10E) of 9.8%. EPS growth lags EBITDA growth due to higher depreciation from Rs 70bn of capex over the next 3 years. Our DCF-based target price is Rs 820/share (Rf 7.2%, Rm 4.5%, CoE 12.2%, Kd 9%, WACC 11.9% & 4% terminal growth rate) implying 15x FY09E core EPS plus Rs100/share of excess cash. We calculate core profit by deducting after-tax financial income from recurring profit. Risk includes lower-than-expected impact of competition on Maruti's margins.