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 3060
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.
Dhawal 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
– 1 of 6 –
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
– 1 of 6 –
Recommendation Chart
Source: PhillipCapital India Research
Contact Information (Regional Member Companies)
SINGAPOREPhillip Securities Pte Ltd
250 North Bridge Road, #06-00 Raffles City Tower,
Singapore 179101
Tel : (65) 6533 6001 Fax: (65) 6535 3834
/ MALAYSIA
Phillip Capital Management Sdn Bhd
B-3-6 Block B Level 3, Megan Avenue II,
No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur
Tel (60) 3 2162 8841 Fax (60) 3 2166 5099
/ HONG KONG
Phillip Securities (HK) Ltd
11/F United Centre 95 Queensway Hong Kong
Tel (852) 2277 6600 Fax: (852) 2868 5307
JAPAN
Phillip Securities Japan, Ltd
4-2 Nihonbashi Kabutocho, Chuo-ku
Tokyo 103-0026
Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141
/ INDONESIA
PT Phillip Securities Indonesia
ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A,
Jakarta 10220, Indonesia
Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809
/ CHINA
Phillip Financial Advisory (Shanghai) Co. Ltd.
No 550 Yan An East Road, Ocean Tower Unit 2318
Shanghai 200 001
Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940
THAILAND
Phillip Securities (Thailand) Public Co. Ltd.
15th Floor, Vorawat Building, 849 Silom Road,
Silom, Bangrak, Bangkok 10500 Thailand
Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921
/ FRANCE
King & Shaxson Capital Ltd.
3rd Floor, 35 Rue de la Bienfaisance
75008 Paris France
Tel (33) 1 4563 3100 Fax: (33) 1 4563 6017
/ UNITED KINGDOM
King & Shaxson Ltd.
6th Floor, Candlewick House, 120 Cannon Street
London, EC4N 6AS
Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835
UNITED STATES
Phillip Futures Inc.
141 W Jackson Blvd Ste 3050
The Chicago Board of Trade Building
Chicago, IL 60604 USA
Tel (1) 312 356 9000 Fax: (1) 312 356 9005 / AUSTRALIA
PhillipCapital Australia
Level 37, 530 Collins Street
Melbourne, Victoria 3000, Australia
Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309
/ SRI LANKA
Asha Phillip Securities Limited
Level 4, Millennium House, 46/58 Navam Mawatha,
Colombo 2, Sri Lanka
Tel: (94) 11 2429 100 Fax: (94) 11 2429 199
INDIA
PhillipCapital (India) Private Limited
No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013
Tel: (9122) 2300 2999 Fax: (9122) 6667 9955
Disclosures and Disclaimers
PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.
This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance.
This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice
Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.
Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report.
Independence/Conflict: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its employees, directors, or affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd may not hold more than 1% of the shares of the company(ies) covered in this report.
Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results.
Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current.
Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.
Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances.
For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.
This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities andExchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.
PhillipCapital (India) Pvt. Ltd.
Registered office:No. 1, 18th Floor, Urmi Estate,95 GanpatraoKadamMarg,Lower Parel West, Mumbai 400013
– 1 of 6 –