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Maruti Suzuki Q3 FY12 results update by Nirmal Bang

Contributed by Nirmal Bang

Results as anticipated; concerns seems to be outdone

Maruti reported broadly in�]line results which were impacted due to loss of production. The company had an impact of 40,000 cars in the Q3FY12 (owing to labour strikes), which should normalize in the coming quarters.

Key Highlights

- Net sales increased 1.7% QoQ and declined 17.4% YoY mainly due to loss of production of around 40,000 units due to labour unrest. Further, sluggish market conditions caused by higher fuel prices and interest rates led to lower volumes in the last quarter.

- EBITDA declined 53.6% YoY to Rs 417cr in Q3FY12 primarily on account of weak sales. Consequently, Maruti�fs EBITDA margin declined further ~120 bps QoQ and ~430 bps YoY to 5.4%.

- The sharp fall in EBITDA, though partially offset by other income, led to 63.4% YoY decline in PAT to Rs 206cr in Q3FY12.

- With a gradual improvement in volumes, Management expects operating leverage to improve Maruti�fs margins by 150�]200 bps.

Valuation & Recommendation

We expect margins to improve gradually from the historic lows of 5.4% in Q3FY12. Comparatively higher sales coupled with lower raw material cost should drive expansion in EBITDA margin in FY13E. Therefore, we expect conditions to improve from FY13E with ramping up of production, higher capacity, price hike, stable interest rates and new launches.

However, the stock has seen a strong run�]up in the past few weeks, up +25% from the recent bottom (since mid�]December). In our view, upside from these levels will be largely dependent on improving sales. However, we do suggest buying the stock on decline.

Using our intrinsic value method, we arrive at a target price of Rs. 1,241 per share for Maruti. At the CMP of Rs 1,234 Maruti is trading at 24.26x and 15.19x FY12E & FY13E EPS of Rs 50.9 and Rs 81.2 respectively. We recommend to HOLD the stock with a target price of Rs 1,333 per share and recommend to buy the stock on decline. Our long term outlook continues to remain positive.