MSIL target price at R1,654

Maruti sources its diesel engines from SPIL. We think this development is neutral with a slightly positive bias as it is earnings accretive, while the transaction multiple is not too expensive (valuation ~4.6x EV/Ebitda on FY12 numbers). Further, we believe there will be greater clarity in transfer pricing.

For Maruti, the transaction appears slightly (around 2.4% EPS) accretive. The accretion to MSIL’s PAT is ~7%, while the share dilution is ~5%. Further, margins may witness slight improvement on account of synergies in raw material purchases and other SG&A (selling, general & administrative) savings. There are no tax shields or other benefits that MSIL might avail of. Optically, MSIL’s Ebitda/PAT margin should improve, given the facility has ac12% Ebitda margin (vs. ~7% for MSIL). Our calculations indicate that Maruti’s margins will improve from 7.2% to ~8.7%. For Suzuki, this transaction appears somewhat neutral for the parent from an earnings perspective. On the flip side, this transaction could result in lower RoCE for the combined entity as the facility is extremely capex intensive, creates the possibility for incremental capex in SPIL that will have to be fully borne by MSIL - though this is ruled out for the short term as the incremental 300k diesel engine capacity will be in MSIL’s Gurgaon plant. Our target price for Maruti is R1,654. We value the parent business at R1,615 based on 11.5x

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