>MARUTI SUZUKI INDIA: Cutting ests on continuing strike; longer term concerns on margins

What's changed

1) Due to the persistent labour strike at Maruti Suzuki’s Manesar plant and supplier Suzuki Power Train, we cut our volume estimates for Maruti Suzuki to 1.2mn units for FY12E (from 1.35mn), with further potential downside should the current impasse between labour and management continue beyond Oct’11. 2) We believe this will prevent the company from

taking advantage of new capacity at Manesar in the face of demand uptick driven by a) seasonally strong festive season, and b) launch of new Swift model in Aug’11. 3) Due to lower volume estimates, we cut our FY12-14E EPS by 13-15% (revised estimates 20% below Bloomberg consensus), and 12-m FY13E P/E-based TP by 9% to Rs1,071 (from Rs 1,173).

Implications

1) Industry-wide – The Society of Indian Automobile Manufacturers believes rising instances of labour unrest in the industry (e.g. tool-down strikes at MRF Tyres and Bosch India over the last two months) are also due to restrictive employment regulations in India (source: CNBC TV18).

As per a study published by the World Bank in Economic Times in Feb’07, there are 47 central laws and 157 state regulations dealing with labour markets, which are at times contradictory and overlapping, preventing efficient framing of employment contracts. 2) Company-specific – Any

worsening in labour disputes could potentially drive structural downside risk to Maruti Suzuki’s margins from higher staff costs in the long run, in our view. Maruti Suzuki’s current staff cost as a percentage of revenue is one of the lowest among peers in India and Asia.

Valuation

The stock is currently trading at 1.8x FY13E P/B vs global peers trading at 1.5x and 7-year historical average at 2.9x.

Key risks

Greater/longer-than-expected impact of labour unrest and competition; interest rate cycle; volatility in commodity and currency markets.

To read the full report: MARUTI SUZUKI