Maruti Suzuki (Q1 FY13)

CMP Rs1,111, Target Rs1,285, Upside 15.7%

• Net sales jump 27.5% yoy driven by 5% yoy increase in volumes and 21% yoy surge in realizations
• OPM at 7.3% was lower than expectations; OPM was down 229bps yoy mainly on account of 240bps surge in other operating costs which was due to adverse currency movements. Sequentially OPM remained flat
• Other income declined 39% yoy, which was offset by 704bps yoy fall in effective tax rate
• Current labour issues at the Manesar plant to have a major impact on volumes as diesel variants, which have been driving growth, are produced at that plant
• Maintain BUY with a lower 9-month target price to Rs1,285

Net sales rise 28% yoy on the back of strong growth in realizations

During Q1 FY13, Maruti Suzuki India Ltd (MSIL) reported net sales growth of 27.5% yoy driven by 21.3% yoy jump in realizations. Volumes were higher by 5.1% yoy but witnessed a fall of 17.9% on a sequential basis. Domestic volumes were higher by 5% on yoy basis, while export volumes rose 5.8% yoy. Volume growth has been primarily driven by the diesel variants as the price differential between cost per km of petrol variant and diesel variant has increased substantially. With MSIL having mitigated its diesel engine supply constraints with a tie-up with Fiat for engine supplies and de-bottlenecking at Suzuki Power Train plant, it was able to meet the increasing demand for diesel variants. Better realizations were on the back of price hikes implemented during the year and also owing to a favorable product mix (higher proportion of diesel variants). Export realizations were also higher by 19.9% yoy on the back of rupee depreciation.

Rupee depreciation impact, primary reason for decline in OPM

During Q1 FY13, OPM for MSIL declined 229bps yoy but remained flat on sequential basis. Margins at 7.3% were below our expectations. On a yoy basis, while operating profit per vehicle was lower by 7.7%, gross profit per vehicle was higher by 22.4%, indicating that the fall in OPM was on account of higher overheads. Increase in other expenditure was driven by impact of rupee depreciation on royalty payments (140bps as a percentage of sales) and higher power & fuel expenses along with losses on commodity/forex hedges (100bps). On a sequential basis, operating profit per vehicle and gross profit per vehicle increased by 11.5% and 21.5% respectively. The benefits of lower raw material costs inclusive of purchases (owing to price increase, better product mix, exports of spare parts) was offset by impact of the rupee depreciation on royalty payments.

Higher depreciation and lower other income further impact bottomline performance

As compared to a 3% yoy decline in operating profit, PAT declined by 22.8% yoy to Rs4,238mn (lower than our expectations). This was owing to 40% yoy jump in depreciation due to capitalization of Plant-B at Manesar plant and 39% yoy fall in other income as the cash balances were lower as substantial portion of FMPs had matured in Q4 FY12. This impact was offset by 704bps yoy fall in effective tax rate to 19.4% due to higher R&D expenses. For FY13, the company has guided for a tax rate of 24%.

Maintain BUY but lower target price to factor in problems at Manesar plant

The current labour issue at the Manesar plant has led to a lock-out at the plant. This plant manufactures all Swift and Dzire models, which have been the driving force for MSIL volumes in the recent past. The company on various occasions has mentioned that unless the safety of its employees in not ensured, they will not announce restart of the plant. We are factoring in a one-month shut down into our estimates which would mean lower volumes, lower margins and lower profits. However, the steep correction in MSIL stock price seems to have factored in the impact of the lockout. We maintain our BUY rating with a revised 9-month price target of Rs1,285.