Notwithstanding the YTD (year-to-date) rally, we retain MSIL (Maruti Suzuki India Ltd) as our preferred pick in autos. Our revised price objective of R1,550 (up 15%) is based on (i) a stronger earnings recovery compared to earlier, reflected in the 11%-8% upward revision to our EPS (earnings per share) forecasts over the next two years, and (ii) a higher P/E (price-earnings ratio) of 16x FY13e (vs. 15.5x), well below the historical peak of an early-cycle recovery multiple.
We raise MSIL’s stand-alone EPS forecasts by 11% in FY13e (estimates) and 8.4% in FY14e, mainly on revised margin assumptions, driven by (i) favourable currency movement, i.e., JPY (Japanese Yen), and (2) higher ASPs (average selling prices). Our volume assumptions are tweaked to factor in stronger export sales, on continuing diversification to geographies outside Europe, and an expanding range of models, such as the Ritz and the Ertiga.
Potential policy announcements, such as a rollback of the excise duty, as well as a hike in diesel prices and ad valorem tax on diesel vehicles may not be negative for MSIL for the following reasons: (i) narrowing differential in cost of ownership may trigger a revival in petrol cars, as customers become indifferent to the fuel option, and (ii) models with superior franchises, e.g., Swift, Dzire, will be able to mostly pass through this increase with a minimal impact on demand. We continue to value MSIL using the same methodology of price-to-earnings. However, we raise multiple to 16x (times), compared to earlier 15.5x, both being early-cycle multiples, based on March 13e, i.e., FY13e, mainly due to expectations of a stronger earnings recovery. This is similar to previous cycles, when the stock has traded upwards of 17x 1-year forward P/E on an early-cycle recovery multiple.
Following muted 2-3% growth in passenger vehicles (PVs) this fiscal year, we expect improvement to 8-10% in FY13e. This will be aided by pent-up demand, as consumers adjust to high, but less volatile, petrol prices and increased diesel engine availability. We expect a full-blown recovery from FY14e, estimated at 16-18%, driven by the lag impact of a likely cut in interest rates in the preceding year.
MSIL best placed to lead recovery: We expect MSIL to outpace the industry over FY12-14e, driven by (i) a slew of launches targeting 80% of the addressable market, even as competitive intensity seems to have peaked, and (ii) a sizeable ramp-up in diesel capacity, up nearly 100% and