Overhang from production issues, rising competition and slowing demand will hurt the stock’s near-term performance.
The share price of Maruti Suzuki, market leader in the domestic passenger car segment, has taken a beating in the past six months. It is down 13 per cent alongside a near-seven per cent cut in consensus 2011-12 earnings estimates. In comparison, the BSE Sensex is down nine per cent. Total financial year-to-date sale volumes of Maruti are down eight per cent compared to the year period, due to macro headwinds and labour issues at its Manesar production facility, which has hit output of the critical Swift and D’zire models in the recent past. This compounds the overhang of heightening competitive intensity. Though volumes are expected to recover in the coming festival season, 2011-12 volume growth is likely to stay flattish to modest, according to analysts and company management.
However, the longer term outlook is undisputed, with industry volumes expected to double over the next four-five years to 4.5-5 million vehicles annually, a compounded annual growth rate (CAGR) of 10-12 per cent. Maruti had 45 per cent market share in 2010-11 and is expected to achieve a CAGR of 15-18 per cent in vehicle sales during this period, according to estimates of analysts at Motilal Oswal Securities. Bearing this in mind, the current weakness in the stock provides an opportunity to own a good franchise from a longer term perspective say analysts.
| PROJECTIONS LOWERED | ||||
| FY12E | FY13E | |||
| Revised | Chg (%) | Revised | Chg (%) | |
| In units | ||||
| Domestic volumes | 1,144,066 | -5.6 | 1,315,676 | -5.6 |
| Export volumes | 124,439 | 0.0 | 143,105 | 0.0 |
| Total volumes | 1,268,506 | -5.1 | 1,458,782 | -5.1 |
| In Rs crore | ||||
| Net sales | 37,703 | -4.3 | 44,327 | -4.1 |
| Ebitda (%) | 9.3 | -20.0 | 9.8 | -22.0 |
| Net profit | 2,198 | -7.6 | 2,588 | -7.8 |
| EPS (Rs ) | 76.1 | -7.6 | 90 | -7.9 |
| Consol EPS (Rs ) | 79.1 | -7.4 | 93.8 | -7.6 |
| E: estimates; % Change is over the brokerages’ earlier estimates Source: Motilal Oswal Securities | ||||
SHORT-TERM BLIP?
The negatives stem mainly from weaker demand scenario for passenger vehicles in the domestic market, hurting from a mix of higher interest rates with no immediate respite in sight as well as fuel price hikes. This volume crunch has led analyst to downgrade their FY12 and FY13 estimates across the board for the company. Consensus FY12 EPS estimates are down about 2 per cent in the last month.
The situation is complicated by continued labour issues at the Manesar factory, which has slowed production there to about 10 per cent of capacity (of 1,250 units per day) in the past week, according to a Quant report. The company, however, is taking steps to normalise production, the results of which are emerging.
Maruti’s domestic passenger vehicle market share had dipped by 10 percentage points since May to 35 per cent in July, but moved up to around 40 per cent last month. However, the drop in market share is seen as a short-term issue for the company. Motilal Oswal Securities’ analysts expect volumes to pick up as production moves to normal levels and interest picks up in the festival season given the new car and variant launches. The company’s market share should increase, believes Quant research, but is expected to settle below its FY11 print.
In contrast, Ashvin Shetty, auto analyst, Ambit Capital, believes the negatives are still not fully priced in, given strong margin pressures in an intensely competitive environment. Price cuts from Honda for its City and Jazz and several new small car and diesel variant launches across most major manufacturers has led to higher discounts (about 10 per cent for all models, except Swift, according to Quant Research) and a very competitively priced new Swift launch. Maruti’s market share could also dip by 200 basis points, year-on-year, to about 43 per cent by 2012-13, Quant envisions. Raw material costs also haven’t eased significantly, points out Shetty. He expects further corrections to consensus estimates, factoring in lower volume growth expectations. This could reflect on the stock's near-term performance.
OUTLOOK
Meanwhile, Maruti has announced plans to nearly double capacity to about 1.9 million units by 2012-13 and plans a one-million unit plant in Gujarat to lower the risks of production disruptions, besides its proximity to a port enabling easier exports. The improved operating leverage, lower raw material costs and thrust to increase localisation of imported components (towards countering royalty outgo) are expected to drive an expansion in margins in the longer term (10 basis points higher than 2010-11 to 9.8 per cent by 2012-13), according to estimates of Motilal Oswal Securities.
The brokerage has a buy rating on the stock with a target price of Rs 1,418 at a P/E valuation of 14.9 times FY13 (13.8 times FY12) EPS estimates. The valuations factor in flat volume growth and 20 basis point margin decline for FY12. While Shetty has a sell rating on the stock and expects his estimates for the company to be revised lower given the volumes clocked to date, he remains positive on the stock from a 12 month perspective.
Overall, analysts expect Maruti's net sales to increase by 4-5 per cent and profits to decline marginally in FY12, and a 17-18 per cent growth (in sales and profits) in FY13. The stock currently trades at Rs 1,093 levels, at a valuation of 13.8 times FY12 EPS estimates.
