At Rs 565 crore, Q3FY11 earnings came in 8% below our estimate and 6% below consensus, driven primarily by a commodity cost increase due to strong yen, year-end discounts, and around 75 bps sequential wage cost hike (55 bps of which is non-recurring).
Commodity cost and adverse forex movement concerns are well known to the market. The stock corrected around 12% in the last month and around 3% on Friday. In our view, the Street is already factoring in margin pressure on the high commodity cost and adverse currency movement. Moreover, we expect positive triggers to play out from FY12, driven by robust domestic demand, launch of the Kizashi and a refreshed model portfolio ? including new Swift, an SX4 diesel variant and the new Swift Dzire; improved pricing power and a favourable change in product mix due to new launches; and the benefit of 2.3% price hike taken in January, somewhat offsetting the high input cost pressure.
We lower our FY12 earnings forecast by around 11%. We increase our FY12 volume and sales estimates by 11% and 6% on robust domestic demand and now expect volumes to grow at a FY11-13 CAGR of 13%. However, due to persistent cost concerns, we expect Ebitda margins to materialise at 10.1% (old: 11.9%) and 10.2% in FY12 and FY13. Consequently, our new EPS estimates are Rs 98.7 for FY12 and Rs 114.7 for FY13. Our estimates imply earnings growth of around 16% in FY13.
We cut target price to Rs 1,425 and maintain overweight rating. The stock now trades at 12.5x FY12e EPS. As we roll forward our model to FY13 estimate, we expect the multiple to stay largely unchanged at 12.4x. So, we apply the current forward-year multiple to FY13e EPS to derive our 12-month target price of Rs 1,425.
HSBC