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Research
Sell Maruti Suzuki - Margins blues - Elara Capital
Posted On : 2010-11-04 22:28:33( TIMEZONE : IST )
- Maruti Suzuki
- Rating : Sell
- Target Price : INR1,411
- Downside : 9%
- CMP : INR1,551 (as on 29 October 2010)
Maruti Suzuki's (MSIL) Q2FY11 results were broadly in-line with our expectations on the net profit level (PAT of INR5.98 bn vs our expectation of INR 5.85 bn). However, EBITDA margins at 10.5% were marginally below our expectations of 10.7%. Input costs, exchange rate movements and royalty costs all impacted margins and below, we try to analyse these issues separately.
Quarter's highlights and our take on the same
Harsh Yen movement, product mix hike royalty from 5.1% to 5.3%
The company's standpoint on royalty cost has not changed much from a long-term perspective (some media reports suggesting that the royalty costs would gradually start moving downwards were not confirmed by the management). As per the management, models developed through India R&D would be based on existing platforms of Suzuki thus would attract royalty. As has been the case is past, the exchange risk on royalty payments is borne by MSIL and not the parent Suzuki. We do not see any easing in royalty rates going forward.
Outlook and valuations: Margins blues; maintain SELL
While we have no doubt about the volume growth story of MSIL, we have our reservations about the short term as well as long term trend in operating margins. By the company's own admission, it is yet to see the full impact of the Japanese Yen appreciation. With that and the increase in input costs, margins would at best be flat in H2FY11 over H1FY11 despite positives of operating leverage. We do not see any relief on margins from royalty costs as the company is likely to maintain it at current rates. The ever intensifying competition would keep margins in check for the long term as well. We are upgrading our earnings marginally to INR81 and INR94 per share for FY11E and FY12E, respectively. Our revised target price now stands at INR1411 (15x FY12). We maintain our 'Sell' recommendation on the stock.
