>MARUTI SUZUKI LIMITED: No valuation cushion at current stock price; down to Sell

■ Current price discounts optimistic outcome; downgrading to Sell
Our Sell rating reflects the rich valuation (23x FY13E core EPS) on our estimates which factor all likely positive outcomes on volumes, mix and margins. The current price implies a reversion to peak profitability levels of the past – an optimistic expectation. In addition, Maruti’s margin is significantly affected by FX fluctuations and hence it should command a lower valuation multiple. We note that Hero and Bajaj, with comparable financial metrics, offer higher FCF yields (7-10% vs. 4% for Maruti). Mahindra remains our preferred stock in Indian autos.


■ Our estimates factor in positive outcome on volumes, mix and margins
We forecast Maruti’s domestic volumes to grow at a CAGR (FY12-14E) of 21% vs. 14% for the industry. This implies Maruti's market share at 44% by FY14E (490bps gain). We forecast volume share of higher ASP models (Swift, Ritz & Dzire) to increase by 200bps to 34% by FY14 due to easing of capacity constraints’ improved supply of diesel engines. On profitability, we expect EBITDA/car to increase from Rs18,011/car in FY12 to Rs27,472/car (90% of peak) by FY14. Despite the expectation of a pullback in profits from the trough in FY12, Maruti's core profits in FY14E will only be 8% higher than FY10 ( its previous peak).


■ Currency-driven profitability swings reduce earnings visibility
For Maruti, costs equivalent to c27% of revenues are denominated in JPY. A 5% appreciation of JPY vs. INR would lead to a 12% fall in EPS. Over the last five years Maruti’s EBITDA margin has declined c1100bps from 15.4% (quarterly peak) in 1Q08 to 4.1% in 3Q12. The entire fall is due to 90% appreciation in the JPY/INR rate over this period. While Maruti has embarked on an aggressive localisation
programme, in the interim, earnings visibility remains low due to the FX impact.


■ Trading at 16x FY14E core P/E and 4% FCF yield
Our target price of Rs1,200 is DCF-based (Rf 6.0%, Rm 8.5%, WACC 13.2% and 4.0% terminal growth rate) and implies 20x FY13E core EPS (Rs49) and 14x FY14E core EPS (Rs67). We define core profit as net profit minus post-tax non-operating other income. Core P/E is (stock price – cash)/ core profit. Risks include better than-expected volume growth and significant depreciation of the JPY.


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