Maruti Suzuki
Rating: Buy
Strong market share performance across all segments: MSIL’s market share performance has remained strong over the past year. Its market share in the passenger vehicles segment rose to 45.5% in H1FY15 compared with 43.6% in FY14 and 41.2% in FY13. In our view, MSIL’s outperformance has been helped by: (i) continued strong growth in rural areas– rural volumes increased 16% y-o-y in FY14 and 26% y-o-y in Q1FY15; (ii) first-time buyer mix has risen to 42% in H1FY15, from 37% in FY14 –MSIL has very high market share (70%) in the entry segment and (iii) successful launch of its Celerio model–6,000 units/ month.
We expect MSIL’s new launch momentum to stay strong over the next two years, which should help it sustain the outperformance. Market share performance was strong across all segments. Here, we would like to highlight two points: (i) A steep improvement in market share in the hatchback segment in FY15 led by the success of Celerio (58-60% so far vs. 44% in FY14); and (ii) MSIL has held on to its market share in the sedan segment despite two launches–Honda Amaze and Hyundai Xcent– which is quite positive. With more launches planned in the UV (utility vehicle) segment over two years, we expect MSIL to improve its market share from 10-12% currently.
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Raising FY17F EPS estimate by 9%: Our FY15-17F (forecast) volume estimates remain largely unchanged. We expect 13% volume growth in FY15F and 17% in FY16F. We raise our ASP (average selling price) estimates by 1-3% for FY15-17F to account for a better product mix–more launches in the high-end segment. Our FY15-16F Ebitda margin estimates is largely unchanged while we have raised our FY17F Ebitda margin by 50 bp. Based on currency rates, Ebitda margins can improve by 60bp from Q2 levels. We build in a 1% reduction in discounts over the next two years (FY16-17F).
Overall, we raise our FY15F EPS (earnings per share) estimate by 5%; our FY16F EPS estimate is largely unchanged, while our FY17F EPS estimate is up by 9%.
Conservative depreciation policy vs. peers:We note that MSIL follows a conservative depreciation policy compared to its domestic peers. MSIL’s depreciation rate (based on average gross fixed assets ex-land) is around 11% which is much higher than, say, M&M, Tata Motors and Ashok Leyland. Thus, MSIL’s earnings quality is better than the rest.
Dividend payout ratio to increase going ahead: MSIL’s board has decided to increase the dividend payout ratio to 18-30% going ahead, from 10-15% earlier. We are building in a 20% dividend payout ratio for FY15-17F into our estimates. However, we note that MSIL still remains a growth stock—at the current price, we estimate the dividend yield at 1% for FY16F.
Reiterate Buy; TP raised to R3,660: We retain our SOTP (sum-of-the-parts) valuation methodology. We value MSIL at R3,813/share based on 18x consolidated FY17F EPS of R212. We then roll back our TP (target price) by four months to Nov-15 at a 13% cost of equity to arrive at our 12-month TP of R3,660.
Given factors like an economic recovery, lower oil prices and benign commodity prices, the outlook for the auto sector is strong. The sector multiples will likely remain towards the higher end of the historical trading range. Further, for Maruti specifically, we foresee some structural changes taking place over the next one-two years: (i) start of its R&D centre in India, leading to faster model rollouts; (ii) a possible fall in royalty rates on new models post higher local R&D; (iii) reduced earnings volatility on lower import content and (iv) likely upside to FCF (free cash flow) from the Gujarat plant deal.
Given the above, we expect MSIL to trade at 16-20x FY17F EPS . We peg our target multiple at 18x FY17F EPS—at the mid-end of our expected trading range. If the four-wheeler industry volume growth is stronger, the stock can trade at 20x FY17F EPS–at the higher-end.
—Nomura
