Maruti Suzuki India Ltd (MSIL)

Result Update

Rs.1,303.20
April 28, 2011

MSIL recently came out with its Q4FY11 results. It net sales stood at Rs.9,863.7 cr, up by 19.8% y-o-y and up by 6.3% q-o-q driven by higher volumes. EBIDTA for the quarter fell from Rs.1,107.7 cr in Q4FY10 to Rs.1,009.7 cr in Q4FY11 due to muted realisations and higher raw material and royalty costs. The Net Profit for the quarter stood at Rs.659.9 cr, up by 0.5% y-o-y and up by 16.7% q-o-q.

Quarterly Financials - Standalone

Rs.Cr.

Particulars Net Sales Income from services Other Operating Income Total Income Expenditure Raw Materials Employees Cost Other Expenditure EBIDTA EBIDTA Margin % Other Income Interest Depreciation Profit before Tax PBTM % Tax Effective Tax Rate % Net Profit NPM % Equity Capital EPS

Q4FY11 9863.7 42.1 186.3 10092.2 9082.5 7862.9 153.4 1066.2 1009.7 10.2% 119.9 6.4 296.7 826.6 8.4% 166.7 20.2% 659.9 6.7% 144.5 22.8

Q4FY10 8234.9 46.0 205.0 8485.8 7378.1 6412.7 153.4 812.1 1107.7 13.5% 82.4 12.9 223.0 954.2 11.6% 297.6 31.2% 656.6 8.0% 144.5 22.7

% Chg 19.8% -8.4% -9.1% 18.9% 23.1% 22.6% 0.0% 31.3% -8.8% 45.6% -50.6% 33.0% -13.4% -44.0% 0.5% 0.0% 0.5%

Q3FY11 9276.7 49.4 168.3 9494.4 8592.6 7445.4 232.5 914.7 901.8 9.7% 128.3 0.4 236.9 792.8 8.5% 227.6 28.7% 565.2 6.1% 144.5 19.6

% Chg 6.3% -14.7% 10.7% 6.3% 5.7% 5.6% -34.0% 16.6% 12.0% -6.5% 1663.9% 25.2% 4.3% -26.7% -29.7% 16.7% 0.0% 16.7%

FY11 36128.2 171.5 740.4 37040.1 33375.7 28794.2 703.6 3877.9 3664.4 10.1% 482.3 24.4 1013.5 3108.8 8.6% 820.1 26.4% 2288.6 6.3% 144.5 79.2

FY10 28958.5 140.4 524.2 29623.0 25672.1 22413.4 545.6 2713.1 3950.9 13.6% 500.1 33.5 825.0 3592.5 12.4% 1094.9 30.5% 2497.6 8.6% 144.5 86.4

% Chg 24.8% 22.2% 41.2% 25.0% 30.0% 28.5% 29.0% 42.9% -7.3% -3.6% -27.1% 22.8% -13.5% -25.1% -8.4% 0.0% -8.4%

(Source: Company Press Release)

Volumes A1 A2 A3 A4 C MUV Total Domestic Sales Exports Total Sales Realisation (Rs/vehicle) EBIDTA/Vehicle (Rs/vehicle)

Q4FY11 7,503 223,029 38,864 128 41,897 968 312,389 30,951 343,340 287,288 30,457

Q4FY10 8,434 173,683 29,702 0 32,466 1,097 245,382 42,040 287,422 286,508 38,539

% Chg -11.0% 28.4% 30.8% 29.0% -11.8% 27.3% -26.4% 19.5% 0.3% -21.0%

Q3FY11 6,869 216,057 32,098 0 43,612 891 299,527 31,160 330,687 280,528 27,272

% Chg 9.2% 3.2% 21.1% -3.9% 8.6% 4.3% -0.7% 3.8% 2.4% 7.8%

FY11 26,485 808,552 131,282 128 160,626 5,666 1,132,739 138,266 1,271,005 284,249 28,830

FY10 33,028 633,190 99,315 0 101,325 3,932 870,790 147,575 1,018,365 284,362 38,797

% Chg -19.8% 27.7% 32.2% 58.5% 44.1% 30.1% -6.3% 24.8% 0.0% -25.7%

(Source: Company Press Release)

Some of the key highlights of the results are as follows:

On the back of 19.5% volume growth, MSILs net sales rose by 19.8% y-o-y to Rs.9,863.7 cr in Q4FY11. However, realisations were muted y-o-y partly hit by Euro depreciation and higher discounts. However, q-o-q realisations improved by 2.4% due to price hike in January 2011. Management indicated that discounts were slightly lower in Q4FY11 vis--vis Q3FY11. Average discount during FY11 were ~Rs.10,500/vehicle. Going forward, management expects discounts to be determined by competitive market forces. Domestic sales in volume terms have grown by 27.3% y-o-y and by 4.3% q-o-q to 312,389 units (highest quarterly sales ever). Growth y-o-y was led by a strong performance from the A2, A3 and C segments. A1 segment witnessed 11% y-o-y fall in volumes. MSIL had gained marketshare in Q3FY11 due to success of the Alto K10 and new Wagon-R. The Alto sales crossed the 100,000 mark in a quarter for the first time. Alto now accounts for one third of MSIL's domestic volumes while retaining the largest selling car in India tag. SX4 volumes doubled on the back of the diesel launch. SX4 Diesel coupled with growth in Dzire volumes helped enrich the product mix. Despite a 27.2% y-o-y volume growth in Q4FY11. Market share of MSIL declined due to an improved performance from competitors.

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Export volumes witnessed degrowth of 26.4% y-o-y and fall of 0.7% q-o-q as the scrappage schemes were phased out in Europe and change in market mix in favour of non-Euro region. In FY11, ~60% of the exports were from non-Euro geographies. Raw material costs decreased by 30 bps q-o-q to 79.7% but up by 180 bps y-o-y. This was driven by a combination of lower realizations and a reduction in the tooling costs, which are now capitalized. The company expects competitive intensity to continue and maintained that it would only take price hikes as a last resort. Employee expenses were lower due to Rs.20 cr write back in provisions for gratuity and leave encashment. Royalty payments remained flat q-o-q but grew by 190 bps y-o-y. MSIL has also effected a change in accounting policy for tooling given to vendors. MSIL has now taken over vendors tooling assets of ~Rs.3.6 bn and will amortise them in its books over the life of the assets. In the earlier practice depreciation on tools was included by vendors in raw material costs. If tools with vendors had been considered part of the raw material cost, the impact would have led to EBITDA margin being 50 bps lower. The company expects margins to remain subdued, as it is expecting an increase in the prices of steel (10-15%), rubber and copper. The company also mentioned that discounts are not likely to fall significantly compared to last year. EBITDA margin declined 330 bps y-o-y to 10.2%. Other expenses rose sharply due to rise in R&D and repair expenses. Tax rates for Q4FY11 and FY11 at 20.2% and 26.4%, respectively, were lower due to benefits on account of R&D expenditure. The management has guided for a 26-27% tax rate in FY12. Also interest cost was much lower at Rs.6.4 cr vs Rs.12.9 cr in Q4FY10. Depreciation cost rose by 33% y-o-y as it includes additional charge of Rs.50 cr on account of change in tooling accounting policy. Net Profit margin dipped by 130 bps y-o-y to 6.7%. For FY11, MSIL posted 24.8% growth in net sales at Rs.36,128.2 cr. EBIDTA Margins were lower 350 bps to 10.1% on the back of higher costs and muted realisations. Net Profit dipped by 8.4% to Rs.2,288.6 cr due to higher depreciation and cost increases. MSIL earned EPS of Rs.79.2 in FY11. The R&D spend during FY11 was to the tune of 1.1% of sales. Going forward the spend would be ramped up to 1.3-1.4% of sales. MSIL has changed its hedging policy. Instead of keeping its Yen exposure open, management has hedged 40% of its currency exposure on exports as well as imports. The average JPY rate for the company in FY11 is 87, and it expects that rate to be lower in FY12. It is currently operating at a capacity of 1.4 mn units per year and the planned second line at Manesar (250,000 units) is likely to come on stream by October 2011. This would be followed by another line of similar capacity by end FY12 end or early FY13. The company incurred capex of Rs.22 bn in FY11 and has a planned outlay of Rs.40 bn for FY12. Since the month of Dec'10, the company has witnessed a lowering in footfalls and conversion ratio. This is attributable to increase in product prices, fuel costs and interest rates. However, despite these headwinds, the management is confident regarding passenger vehicle industry growth of 10-15% during FY12 and believes it will be able to maintain its overall market share at 45%. Exports could improve in FY12, as the company has increased its exposure to non-European markets (60% in FY11 vs. 25% in FY10). Management has highlighted modest volume growth ahead due to the high base and headwinds as the cost of acquisition and maintenance for passenger vehicles (PVs) mount. The company is keeping a close watch on the supply scenario from Japan and currently does not perceive any major risk to production schedule owing to component supply disruption. MSIL has also started importing parts from Germany for its compact car, A-Star. It exports this car to European markets. There is a scheme in Europe in accordance with which if it sources 40% of components required for cars exported to European markets, it can avail of certain tax benefits from the government. The benefit could increase the average realisation per vehicle exported by MSIL to European markets. In FY11, MSIL explored new destinations like Malaysia, Vietnam, Laos, Brunei, Algeria, Chile, Indonesia, South Africa, Hong Kong and Australia. This resulted in increased contribution from non-European markets at ~ 60%, against ~25% in FY10. The management indicated that commodity prices could increase going forward and put pressure on margins. However, the management is undertaking cost control measures to reduce the impact of the same. Demand in the Indian market remains strong. MSIL still has a capacity constraint and is unable to produce enough cars to meet demand. MSIL strengthened in service network to 2,879 outlets as of December 2010 and sales network to 889 outlets (in 631 cities).

Concerns
Intensifying competition could pose a threat to MSIL in terms of sales and profit growth. Adverse currency movement (depreciation of INR vs USD, depreciation of Euro vs USD and appreciation of yen vs USD) could lead to higher input costs, higher other expenses (on account of forex loss) and in turn hurt margins. With a rise in commodity prices and elevated royalty charges, MSIL could face pressure on its margins.

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Rising fuel costs may impact demand for cars. Increase in interest rates and unavailability of credit could adversely impact MSILs financials as a lot of vehicles bought use financing.

Conclusion:
MSILs Q4FY11 results were above expectations. However, this was largely due to low tax provision that the company availed off owing to increased R&D expense. It was also driven by strong volume growth and realisations improving q-o-q with richer product mix with sales of Kizashi and SX4 diesel. The introduction of new models and a lower total cost of ownership, combined with a wide sales and service network has helped the company. Geographic mix shift in export markets should buffer MSIL from Euro realisation volatility. Though the demand environment remains healthy in the passenger car segment, MSIL is likely to face challenges in the form of hardening interest rates driven by inflationary pressure (as about 65-70% of its cars are being financed). Moreover, the capacity constraints currently faced are likely to limit its volume growth. Heightened competition in the compact car segment with new entrants could result in margin pressure. Margins for MSIL are close to their bottom after enduring many quarters of pain (caused by higher royalty, unfavourable currency and higher raw material costs). MSIL has the advantage of unmatched service and distribution network (especially in the Tier 2 & 3 cities). The ownership cost of a MSIL vehicle remains relatively lower than competition (an enviable advantage in a cost-conscious market in India). Launch of an MUV and refreshments of their existing models (new Swift and downsized Swift Dzire) as and when capacity comes on stream could be an additional volume driver going ahead. Rural sales account for ~20% of overall sales volume, while sales contribution from top 10 cities stands at ~40% of overall volumes. FY11 results were almost in line with our estimates. We are maintaining our FY12 estimates even though at the operating level it could be under achieved and at the topline level it could be overachieved. Key risk faced by MSIL is a slowdown in sales on a high base due to demand getting affected by high fuel costs / high car costs / uncertainty in income levels / slowdown in rural spending. We had stated in our Q3FY11 update between that the stock could trade in the Rs.1,188 -Rs.1,371 band for the next quarter. Post the issue of the report, the stock touched a high of Rs.1,345 on March 3, 2011 and a low of Rs.1,125.9 on March 21,2011. At the CMP, the stock is trading at 14.3x FY12E EPS of Rs.91.4. We think the stock could trade in the Rs.1,188 (13x FY12E EPS) to Rs.1,420 (15.5x FY12E EPS) band for the next quarter. Quick Estimates
Particulars (Rs in Crs) Operating income PBIDT (excluding other income) PBIDTM (%) Profit after Tax PATM (%) EPS P/E (x)
*A = Actual, E =Quick Estimates

FY09 20413.3 2020.9 9.9% 1482.5 7.3% 42.2 30.9

FY10 29623.0 3954.3 13.3% 2497.6 8.4% 86.4 15.1

FY11 (E)* 35128.2 3653.3 10.4% 2248.2 6.4% 77.8 16.8

FY11 (A) 36128.2 3664.4 10.1% 2288.6 6.3% 79.2 16.5

FY12 (E)* 41265.5 4497.8 10.9% 2640.9 6.4% 91.4 14.3

(Source: Company, HDFC Sec Estimates)

Analyst: Sneha Venkatraman (sneha.venkatraman@hdfcsec.com)

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