We have a ?buy? rating on Maruti Suzuki on expectations of a strong rebound in the FY13-14e EPS, driven by improved sales and margin recovery. Our forecasts assume the US dollar to rupee at R53 and US dollar to Japanese yen at 80 in FY14e. A 5%-change would revise EPS forecasts by 15%. We raise our price objective to R1,650 (from R1,450 earlier) based on lower uncertainty and increased growth visibility.
Historically, the Maruti stock has mirrored cyclical trends over the structural consumption theme, reflected in a wide P/E band of 10-18x. On our 10% above consensus forecasts implying profits more than doubling over forecast period, we expect the stock to trade up to early cycle multiple of 16x FY14e (earlier 14.5x).
Maruti is entering into a phase of less uncertainty and increased growth visibility helped by new launches in popular segments, such as compacts and utility vehicles, labour normalcy (thereby easing production constraints), and favourable currency trends on costly imports. Despite flat domestic sales in the H1FY13, we expect Maruti to register a 6% growth in FY13e and 24% in FY14e, buoyed by the new Alto 800 with contemporary features and engine (which could add around 10,000 units per month net of cannibalisation with the existing platform).
In addition, sustained momentum in Ertiga multi-purpose vehicle, which also aided by shift in customer preferences, and increased availability of diesel engines (40% of car capacity, which is 1.5x current proportion) will help the company register higher growth.
We retain of 170 basis points increase in Ebitda margins over FY12-14e (7.1% to 8.8%), which factors in recent wage agreement at Gurgaon, largely cushioned by better sales mix (Ertiga/new Alto) leading to average sales price revisions of 1%-2%. Other drivers, such as localisation and operating leverage, are expected to drive margin expansion.
BofAML