Driving past the bumps

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SummaryCar sales go up in periods of rising GDP growth and falling interest rates.

After three years of gloom, Maruti’s earnings outlook is finally improving. Passenger vehicle (PV) demand should gradually recover over FY14-15 with improving GDP growth and falling interest rates. A renewed focus on exports and launch of a new compact SUV (sports utility vehicle) will boost volume growth further. We expect Maruti’s Ebitda margins to recover to near-10% by FY15 driven by a weakening yen, improving product-mix and rising localisation. Earnings sensitivity to the yen will drop as localisation rises and exports pick up, which is a positive for multiples. We upgrade FY14-15 EPS by 11-17%, mainly due to the weaker yen. We upgrade Maruti from Sell to Buy with a target price of Rs 1,915.

India’s GDP growth has bottomed in recent quarters and CLSA’s economics team expects a gradual improvement in growth from 5.5% in FY13 to 6.5% in FY15. Easing inflation is expected to drive a 100 bps cut in interest rates by RBI in 2013. PV industry growth has historically improved in periods of rising GDP growth and falling interest rates and we expect demand to start recovering by mid-FY14. We forecast PV growth to improve to 13% CAGR over FY13-15 from 5% CAGR over FY11-13. Maruti is increasing its focus on the high-growth SUV market and will launch a new compact SUV in FY15, boosting volume growth.

Maruti has increased its focus on exports and is targeting to increase the share of exports in volumes from 11% in FY13 to 15% by FY16-17. This will be achieved by entering new markets, launching more products in exports markets and increasing penetration in Africa.

We believe that Maruti’s Ebitda margins will improve to near-10% levels by FY15 driven by a weaker yen, operating leverage benefits, improving product-mix (rising diesel car share) and rising localisation at vendors. CLSA’s economics team expects the recent yen weakness vs. INR (10% from Q2 levels) to sustain.

Earnings sensitivity to the yen should drop over FY14-16 as exports pick up and localisation at vendors improves. This should reduce earnings volatility.

CLSA

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