>MARUTI SUZUKI INDIA: Expect a Swift recovery

Recommendation: Hold
Price target: Rs1,138
Current market price: Rs1,163

Realisation expansion a positive surprise in Q3FY2012
During Q3FY2012, Maruti Suzuki (Maruti) reported a 7.1% quarter on quarter (QoQ) increase in net realisations. Lower discounts, price hikes and an improved product mix took the realisation to an all time high. The contribution/vehicle also surprised and reached to its highest level in the last six quarters.

Worst for margins behind; expect gradual improvement from Q4FY2012 
The company is expected to see a 100-150 basis points (bps) margin savings on account of favourable operating leverage as production ramps up in Q4FY2012. However, some hit is expected as vendors are compensated for higher costs with a lag. Vendor compensation is expected to have a positive effect of 100bps.

Foreign exchange (forex) related marked to market (MTM) losses in commodities and direct and indirect imports were to the tune of Rs75 crore, thereby impacting margins by 100bps. 

In case the currency remains stable, the company may see a 100-250bps margin expansion from Q4FY2012 onwards. FY2013 may see further improvement once the benefit of vendor hedges comes through. 

Open positions may cause margin volatility; 100bps Q-o-Q impact felt in Q3FY2012 Maruti saw a 100bps impact on margins on account of adverse forex movement. The company hedged its dollar/ yen as well as dollar/euro exposure for Q4FY2012 while FY2013 exposure is completely open. During Q3FY2012 the dollar appreciated 0.7% against the yen while it appreciated 4.5% against the euro. 

While the company hedged stable currencies, it has kept the most volatile dollar/rupee exposure open. An adverse currency movement in the rupee can have a direct bearing on the margins. During Q3FY2012, the pure currency impact on royalty is to the tune of Rs75 crore which includes reinstatement of liabilities of Rs20 crore and Rs19 crore of royalty hit related to H1FY2012.

ValuationWe are marginally cutting our earnings per share (EPS) estimates for the company as we incorporate the management's expectations of the future. Since our last Buy recommendation, the stock has achieved our target price. Our revised target price of Rs1,138 discounts FY2013 expected EPS of Rs81.3 by 14x. We believe that the current price is factoring in the positives. We recommend a Hold on the stock.

RISH TRADER