| STOCK UPDATE Maruti Suzuki India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,316
Current market price: Rs1,155 Annual report review Key points -
Indian passenger car market on a non-linear structural uptrend: During FY2011, the Indian passenger car industry surprised with a 29% growth against an expectation of a growth of 10-12% initially. Maruti Suzuki (Maruti)'s chairman highlighted that the demand for cars is expected to double in the next five years as the real cost of buying a car has declined considerably. However the year-on-year (Y-o-Y) growth will be non-linear due to different cycles of economic environment. -
The pace of FY2011 growth surprised; however future outlook cautious: The confluence of negative macro cycles such as interest rates, fuel prices and inflationary pressures is expected to hurt passenger car demand in FY2012. The earlier growth expectation of 10-15% has been downgraded to single digit growth. Unlike as in FY2011 which had an element of a positive surprise, the future is laden with uncertainties. -
Almost entire growth to be driven by non-petrol cars: A significant stress is being witnessed in the petrol segment due to a dramatic shift in demand for alternative fuels. Also, heightened competitive activity has resulted in aggressive discounts on several petrol models around the year. The company indicated that discount levels would be higher going forward as compared to FY2011. -
Asset heavy strategy to add beta to earnings: The company has expanded its gross block at a compounded annual growth rate (CAGR) of 19% in the last five years. The Manesar II line will be commissioned from September 2011 at a cost of Rs1,800 crore while the Manesar III line is expected to be commissioned from September 2013 at a similar cost. Unofficial figures are pegging the new greenfield plant at a cost of Rs6,000 crore. Investments of this magnitude would absorb the next two years' annual cash flows. Even as the company has approximately Rs7,400 crore of cash in its books as on FY2011, the future balance sheet would look asset heavy. This would add significant beta to the profit and loss account based on capacity utilisation and margins. Hence, volumes and margins would become key influencers for the company's stock price performance. A sharp correction in the company's stock price has priced in the negatives partially. We see a dramatic improvement in realisation and contribution margins from Q4FY2012 onwards as the full effect of the Manesar II line would be felt by then. Q4FY2012 may also see a revival in growth as the interest rates peak and inflationary pressures stabilise. Our estimates for FY2012 and FY2013 remain unchanged at Rs93.5 and Rs109.7 respectively. We are valuing the company at Rs1,316, discounting FY2013E earnings by 12x. We retain our Buy rating on the stock. However a key risk remains the tiff with the workers at Manesar which has now aggravated and is taking longer to be resolved.
SECTOR UPDATE Fertilisers Urea makers have the advantage -
The volume sales data of the leading 13 fertiliser companies in India shows a decline in the offtake of the complex (non-urea) fertiliser products due to a considerable increase in the average selling price of non-urea fertiliser under the Nutrient-Based Subsidy (NBS) regime. Among the non-urea fertilisers there is a growing preference for complex fertilisers with low nutrient content as compared to DAP/MOP that has high single nutrient content. -
Higher prices of non-urea fertilisers are resulting in a shift towards higher usage of urea especially by marginal farmers who show an extremely price sensitive behaviour. Thus, the volume growth for urea manufacturers like Chambal Fertilisers and Chemicals (Chambal), Zuari Industries (Zuari) and Nagarjuna Fertilisers and Chemicals (Nagarjuna) is likely to remain healthy at least till the new urea policy becomes effective. |
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