Maruti Suzuki (Q4 FY12)

CMP Rs1,379, Target Rs1,555, Upside 12.7%

• Net sales fall 16.2% yoy driven by 11% yoy increase in net realizations. Volumes were higher by 4.9% yoy

• OPM at 7.3% was in line with expectations. However, it was down 268bps yoy owing to higher costs across the board. Sequentially OPM improved 203bps on the back of benefits of operating leverage

• 148% jump in other income and lower effective tax rate resulted in higher than expected net profit at Rs6.4bn

• Increasing diesel engine supplies to support volume growth

• Maintain BUY rating and retain target price of Rs1,555 

Net sales rise 16% yoy on the back of strong growth in realizations

During Q4 FY12, Maruti Suzuki India Ltd (MSIL) reported net sales growth of 16.2% yoy driven by 11% yoy jump in realizations. Volumes were higher by 4.9% yoy but witnessed a jump of 50.4% on a sequential basis. This was on the back of a plant shutdown at the Manesar plant during Q3 FY12. Domestic volumes were higher by 2.9% on yoy basis, while export volumes jumped 25.7% yoy. Rural sales increased by 12% yoy and now account for 25% of domestic volumes. 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 13.7% on the back of rupee depreciation. With a slowdown in Europe, the company witnessed a fall in sales to the region.

Benefits of operating leverage led to sequential improvement in OPM

During Q4 FY12, OPM for MSIL improved 203bps qoq but fell 268bps yoy. Margins were in line with our expectations. While operating profit per vehicle was higher on a sequential basis, contribution per vehicle was lower by 2.9% qoq. On the other hand, while operating profit per vehicle declined on a yoy basis, contribution per vehicle was higher 2.3% yoy. Sequential improvement in margins was on the back of benefits of operating leverage and favorable currency movement. Yoy fall in margins was due to higher raw material costs as well as adverse currency movements.

Bottomline performance improved on the back of higher other income

As compared to a decline of 15% yoy in operating profit, PAT declined by 3% yoy to Rs6,398mn (ahead of our expectations). This was owing to 147.6% yoy jump in other income, which was driven by receipts from maturity of fixed maturity investments. Depreciation was higher due to capitalization of expenses towards capacity expansion at Manesar plant B. Effective tax rate was lower on account of capital gains nature of other income.

Key takeaways from the conference call

1. With rising trend of diesel vehicle demand, the company is expecting an increased supply of diesel engines of about 400,000 (300,000 from Suzuki Power Train and 100,000 from the tie-up with Fiat).

2. Also the company is planning to set up a diesel engine plant with an investment of Rs17bn. The plant is expected to come up in two phases. Phase I with a capacity of 150,000 engines is likely to commence operations in the middle of next financial year and Phase II is expected to commence operations in 2014.

3. To spur up the demand for petrol vehicles the company is taking initiatives such as offering interest subvention, targeting segments which are less influenced by fuel price and exchange offers.

4. The company has guided for a capital expenditure of Rs30bn in FY13 as compared to Rs27bn in FY12. With respect to R&D plant at Rohtak, the company plans to invest Rs20bn of which Rs9bn has already been invested and Rs5bn is expected to be invested in FY13.

5. Ertiga has received tremendous response and the company has got 22,000 bookings. Current order backlog for the new Swift and new Dzire is 18,000 and 10,000 respectively. The waiting period for diesel variants of Swift and Dzire is at 6 months and 4 months respectively.

6. Discounts were higher on a sequential basis.

Maintain BUY rating

For most of FY12, passenger car demand remained sluggish on back of various macro factors. For MSIL, the scenario worsened owing to shutdown at its Manesar plant. However, over the past couple of months the demand for passenger cars, especially diesel variants has been robust. With MSIL ramping up production capacity for diesel engines, the scenario should bode well. Further, margins are also expected to improve given the localization initiatives the company is taking and current favorable currency trends. We maintain our BUY recommendation with a 9-month price target of Rs1,555.