Accumulate Maruti Suzuki; target of Rs 1290: PLilladher

“Maruti Suzuki’s (MSIL’s) Q1FY13 operating performance was ahead of our estimate on account of higher top-line. Despite the 18% QoQ drop in volumes, top-line declined by only ~8% on account of 12% sequential growth in realizations on account of better product mix in favour of diesel vehicles (~900bps improvement QoQ to 38% of overall volumes). In our view, MSIL is the best play on the recovery in the macroeconomic situation. Given the strong product portfolio of ‘Swift’, ‘Dzire’ and the success of ‘Ertiga’, we maintain our long-term positive view on the stock and expect a strong recovery in FY14E (volume growth of 14.8%). Uncertainty regarding resuming production at Manesar, in our view, would continue to be an overhang on the stock in the near-term.”

“Top-line grew by 27.5% YoY to Rs108bn (PLe: Rs97.6bn) led by ~21% growth in pricing on account of better product mix with Diesel vehicles accounting for ~38% of its sales volumes (~29% in Q4FY12) and higher realization in exports. Despite the 18% QoQ drop in volumes, top-line declined by only ~8% on account of 12% sequential growth in realizations. On account of better product mix and higher export realizations, material cost declined by 180bps QoQ. However, other expenses were higher by 170bps QoQ on account of 100bps exchange rate impact on royalty and another 60bps impact of exchange rate on commodity cost & forex. As a result, EBITDA margins were maintained at 7.3% QoQ which is commendable given the tough environment of rising costs and increasing discounts on petrol vehicles. As a result, EBITDA stood at Rs7.8bn (PLe: Rs6.8bn).”

“We expect the margins to improve by ~130bps over the next two years, mainly on account of currency hedging, operating leverage and better product mix. Given the strong product portfolio of ‘Swift’, ‘Dzire’ and the success of ‘Ertiga’, we maintain our long-term positive view on the stock and expect a strong recovery in FY14E. (Volume growth of 14.8%). Uncertainty regarding resuming production at Manesar, in our view, would continue to be an overhang on the stock in the near-term. Maintain ‘Accumulate’ rating on the stock with a 1-year target price of Rs 1290/share. Delay in resuming operations at Manesar in a months’ time is a key risk to our call,” says Prabhudas Lilladher research report.

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