Q2 results: Maruti reported top-line Ebitda and profit after tax growth of 26%, 160% and 195% year-on-year, respectively. Ebitda was 27% ahead of our estimate. Comparison on y-o-y basis is distorted, as Q1FY14 numbers include SPIL (Suzuki Powertrain India Ltd), plus the company had a strike in Q2FY13).
We increase our net income estimates by 25% in FY14 and by 11% in FY15. Most of our upgrade is coming from Q2 beat, where we saw first signs of localisation gains and stronger INR.
* Volumes and discount assumptions largely unchanged: We expect flat volume growth over FY14/15. In FY15, we expect 10% volume growth in the domestic market and 8% growth in exports. Rural represented 31% of sales in Q2FY14 and grew by 24% y-o-y, and this will likely be a key driver for FY15 volumes. Most of our growth assumptions stem from better rural growth, as the urban demand recovery will be slow.
n Build better export profitability and cost rationalisation gains: In a bid to reduce currency volatility, the company targets to reduce raw material-linked forex exposure from 20% of net sales at end-FY13 to 16.5-17% at end-FY14 and to 14-15% by end-FY15. Localisation also leads to cost savings, and we saw early gains from that in Q2 results.
n Currency has appreciated: On our estimates, every 1% INR appreciation against JPY (yen) leads to a 2% earnings increase for MSIL, thus its currency sensitivity is high. For F14, we factor in USD /INR of 61.5 and USD/JPY of 97, closer to spot. Benefitting from both favourable currency and cost savings from localisation, Ebitda margins will improve to 12.4% in FY15 .
* Our price target rises to R1,786: This largely reflects our earnings upgrade and a reduction in our bear case probability weighting, as INR has stabilised. At our price target, F15e P/E would be 15.2x.
New model news flow could re-rate the name: In a slow year(s), it is tough to base a call on industry recovery, so new model cycle becomes paramount. Our
channel checks indicate that MSIL is working on a new car in early 2014 and an SUV/crossover in F15. Any confirmation on new launches would likely lend high visibility to volumes and support a re-rating.
- Morgan Stanley