Maruti Suzuki - Company Update - In a sweet spot; retain Buy

Maruti Suzuki - Company Update - In a sweet spot; retain Buy

Rating: Buy; Target Price: Rs3,580; CMP: Rs3,066; Upside: 16.8%



In a sweet spot; retain Buy



We re-iterate Buy on MSIL with a revised TP of Rs3,580. Recent
interaction with dealers signals continued recovery in urban demand
and traction in rural demand. While the industry has seen YoY growth
of 5% YTDFY15, MSIL has grown by 14%, improving its market share by
220bps due to the success of new launches, deeper rural penetration
and recovery in urban markets. Market share gains will continue as it
is entering a very strong product cycle 1) new sedan “Ciaz” to replace
SX4, will be available shortly 2) more models are due in the UV space
starting with the Sx4 Cross, 3) it is set to enter the small LCV
segment and 4) face-lifted Swift is expected soon (last facelift was
in 2011).

$ Discounts to trend lower: Analysis of model wise discounts for MSIL
indicates that the company has reduced discounts across models for
September’14. Discounts on Alto and Wagon-R (36% of domestic sales)
have dropped by Rs 3,000/vehicle to Rs32k from Rs35k while that on
Ertiga was down by Rs2k per vehicle and Omni by Rs 5k per vehicle.
With no discount on Celerio (unlikely in the near term as waiting
period is 2-3 months) and likely launch of Ciaz coupled with
traditionally lower discounts during festive period, we expect blended
discounts to trend lower from 3QFY15 onwards (Rs21k in 1QFY15).

$ YTDFY15 market share gains by 220bps, entering into strong product
cycle: YTDFY15 market share gains by 220bps to 52% (vs.  49% in FY14)
in domestic passenger car industry reflect better than industry growth
for MSIL. The company is entering a very strong product cycle (India
is Suzuki’s key market – there are plans to launch 14 new models
/refreshes in India over FY13-FY17E). Post the successful launch of
Celerio, the Ciaz will be shortly available in showrooms this festive
season (the company has already received bookings of 5,250 units).
This will be followed by entry into new segments like SUV/MUVs with
the launch of Sx4 Cross and XA Alpha. The company is also open to
leveraging opportunities in the LCV space and compact diesel engines.
Further, dealers indicated that a face-lifted Swift is expected soon.

$ Volume and earnings upside remains: We are upgrading our earnings
for FY15E/FY16E each by 3.9%/3.3% respectively to factor in better
than expected volume growth for the company. Also the Fx remains
favourable (Yen/INR rate has depreciated from 0.60 to 0.57 over the
past month. For MSIL, costs equivalent to 22% of sales, including
royalty to Suzuki, are Yen-linked; 1% depreciation in Yen can lead to
~2% EPS increase) and discounts are likely to trend lower from current
levels.

$ Valuation and risks: We expect MSIL to deliver strong 31% EPS CAGR
over FY14-16E led by gradual demand recovery, market share gains,
rising exports and improving margins. We also see the potential for
earnings upgrades as industry demand and margins could surprise on the
upside in the first year or two of recovery. Retain Buy with revised
TP of Rs3,580 (20x September’16E EPS, 1-sd above historical average).
Key risks are, 1) Unfavourable Fx and 3) Failure of new launches to
gain expected market share.