CAPITA TELE FRIDAY RECOMMENDATION

CAPITA TELE RECOMMENDATION DT:27.7.07





Maruti Udyog

Moving in all directions

A series of new launches in the hitherto untapped segments will help it to outperform the sustained growth in the Indian car industry

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Maruti Udyog

BSE Code
532500

NSE Code
MARUTI

Bloomberg
MUL@IN

Reuter
MRTI.BO

52-week High/Low
Rs 990 / Rs 715

Current Price
Rs 830 (as on 27th July 2007)


Indian car industry is set to grow consistently in future. Rising income levels due to strong economic growth and outsourcing and service sector booms and increased availability of better roads will increase car penetration in India. Currently car penetration of 7 vehicles per 1000 individuals is one of the lowest in the world. It’s even lower than Pakistan and Sri Lanka (both around 12 per 1000). China’s car penetration was only marginally higher than India’s a few years ago, but due to CAGR of 80% its now at 14 per 1000, almost double India’s. Suzuki, Japan’s 54% subsidiary Maruti Udyog (MUL), which is to be renamed Maruti Suzuki India, is best placed to ride the expected increase in penetration.

Records a swift 26% sales growth (on 17% volume growth) and 35% PAT growth

For the quarter ended June 2007 MUL registered a healthy 26% growth in its net sales (inclusive of its service income) to Rs 3930.82 crore. (net sales from car sales grew by 26% to Rs 3913.67 crore). It was backed by growth of 17% amounting to 169669 units in its total sales volume. Its domestic sales that represent 95% of the total sales volume rose by 17% to 1,60,604 units. Its exports grew by 16% to 9,065 units. Its income from services grew by robust 50% to Rs 17.15 crore.

In spite of rise in metal prices, discounts and higher promotional spends operating margin has been maintained around 14.6% due to benefits of rupee appreciation on imported components and richer product mix. Thus the operating profit surged by 26% to Rs 574.79 crore. The other income grew by healthy 56% to Rs 223.25 crore. However commisiioning of new plant lead to spurt of 365% to Rs 15.10 crore in its interest expense and depreciation cost rose by 28% to Rs 82.20 crore. Thus the PBT growth was restricted at 32% to Rs 700.74 crore.

Though the effective tax rate declined by 200 bps to 29%, the tax provisions rose by 23% to Rs 201.14 crore owing to the increased profit base. The PAT rose by 35% to Rs 499.60 crore.

Improved product-mix

While maintaining its lead in A segment small cars, the company is moving more towards premium B segment cars, diesel cars and C segment cars, which fetch more margins and bring additional volume, hitherto not catered to by Maruti.

Well-placed to capitalize on growth opportunities

In order to make India a small car hub, Government’s initiatives like reducing excise duty on small cars and investing in port infrastructure to support automobile exports, is now paying off as Suzuki Motor Corp has initiated to make India as its hub for sourcing small and compact cars for its global markets. Exports are expected to boost from FY09. Thus, the story of India being a small-car hub is seen to be materializing. Export is likely to contribute 11.1% of total volumes in FY09, up from 5.8% in FY07.

Huge capex at the most opportune time to sustain growth

MUL’s rising share in Suzuki’s profitability has prompted the Japanese company to invest Rs 9,000 crore in India, which is divided among the new car plant, diesel engine plant and modernization of the existing facilities.

Capex Amount
Purpose
Investment by MUL

Rs 2500 cr
4th Car Plant at Manesar
Rs 2500 cr

Rs 4000 cr
Modernization of existing facility
Rs 4000 cr

Rs 2500 cr
Diesel engine plant (30:70 JV)
Rs 750 cr (30%)

Rs 9000 cr
Total
Rs 7250 cr


The 4th car plant at Manesar would entail an investment of Rs 2,500 crore, in phases until 2010. Currently this plant is rolling out 1 lakh units p.a. Further, the capacity is expected to reach 3 lakh units p.a. by 2010. Besides manufacturing the premium hatchback Swift, the new plant will also manufacture a new export model expected to be launched in 2008-09. As per the company’s strategy, the new platform will also tie in new engine series to cover both Euro4 and Euro5 compatibility in order to realize unhindered export boom.

Rs 4000 crore for modernization of existing facilities would mainly be utilized for upgrading the existing facilities coupled with marginal expansion of capacities. This will include investment towards R&D facilities, designing facilities, building a test track, etc.

Suzuki’s only Diesel engine Plant at Manesar would entail an investment of Rs 2,500 crore, in phases until 2010. The diesel engine plant has been set up by Suzuki Powertrain India Ltd, a 30:70 JV between MUL and its parent Suzuki Motor Corp. The total capacity will be 3,00,000 diesel engines per annum to be developed in phases. The initial annual capacity will be 1,00,000 diesel engines, 20,000 petrol engines and 1,40,000 transmission assemblies. The diesel engines manufactured at this plant will be used captively for its diesel models and will also be exported to Suzuki’s group companies across the world.

Diesel cars to strengthen its position further

The launch of Swift Diesel has marked MUL’s entry in the diesel car segment, which has further strengthened its position. MUL will no longer remain aloof from the diesel car market, which currently forms 27% of the car market and is expected to increase to 35% by 2010. With the petrol prices on an up move, globally there has been an increasing preference for diesel cars. The diesel engine plant established at Manesar will take care of the growing requirement of diesel engines as well. The timely entry in the alternate fuel car segment will help MUL in consolidating its position and benefit from the potential growth in this segment.

SX4 AND Grand Vitara makes it one-stop shop for all kinds of cars

Till now MUL was weak in the C-segment car and SUVs. However in the quarter ended Jun ’07, the company launched SX4 sedan. It also launched Grand Vitara, a latest geenration SUV in Jul ’07. It now offers a complete range of cars. Both the new launches have met with encouraging response.

Grand Vitara happens to be the fifth model in less than 12 months. The WagonR Duo, Zen Estilo, Swift Diesel and SX4, while being successful, also showcase the diversity of models that Maruti has been able to offer in the past year. And the new launches have bee successful.

Suzuki Motor Corporation' s R & D hub for Asia
In recent years, Maruti has made major strides towards its goal of becoming Suzuki Motor Corporation' s R & D hub for Asia. It has introduced upgraded versions of WagonR, Zen and Esteem, completely designed and styled in-house.

The company's quality systems and practices have been rated as a "benchmark for the automotive industry world-wide" by A V Belgium, global auditors for International Organisation for Standardisation.

Outlook is bright

Car is the only segment of the auto industry which we believe is far away from the cyclical peak and has the potential of a consistent growth of at least 10-12% on the back of higher disposable income and improving road infrastructure in spite of higher interest rates and fuel prices.

Due to MUL's acknowledged strengths like widespread sales and service network, consistent high customer satisfaction record, affordable spares, fuel efficiency, reliable quality and trust and goodwill associated with the Maruti brand and a complete range of products will ensure that in spite of it being the market leader, it will grow faster than the market.

Valuations are attractive

We expect MUL to register sales and net profit of Rs 18170.82 crore and Rs 1889.97 crore in FY 2008. On equity of Rs 144.46 crore and face value of Rs 5 per share, EPS works out to Rs 65.4. By then the book value will also inch very close to Rs 300 mark. The share price trades at Rs 830. P/E works out to just 12.7. The scrip should outperform the market going forward.

Maruti Udyog: Financials





0403(12)
0503(12)
0603 (12)
0703 (12)
0803 (12P)

Sales
9108.97
10962.41
12052.20
14653.89
18170.82

OPM (%)
10.2
12.8
13.5
13.6
13.7

OP
930.53
1406.27
1626.61
1990.41
2488.01

Other Income
334.45
391.43
429.19
598.41
650.00

PBIDT
1264.98
1797.7
2055.80
2588.82
3138.01

Interest (Net)
43.39
36.01
20.39
37.63
61.91

PBDT
1221.59
1761.69
2035.41
2551.19
3076.10

Depreciation
494.92
456.83
285.42
271.36
337.02

PBT
726.67
1304.86
1749.99
2279.83
2739.08

EO
43.2
0.00
0.00
0.00
0.00

PBT
769.87
1304.86
1749.99
2279.83
2739.08

Provision for tax
227.69
451.26
560.94
705.36
849.12

PAT
542.18
853.60
1189.05
1574.47
1889.97

EPS*
17.7
29.5
41.2
54.5
65.4

*Annualised on current equity of Rs 144.46
Face Value of Rs 5; (P): Projections
EO: Extraordinary item
EPS is calculated after excluding EO and relevant tax
Figures in Rs crore
Source: Capitaline Corporate Databases




Maruti Udyog: Results





0706 (3)
0606 (3)
Var. (%)
0703 (12)
0603 (12)
Var. (%)

Net Sales
3930.82
3125.47
26
14653.89
12052.20
22

OPM (%)
14.6
14.6

13.6
13.5


OP
574.79
456.60
26
1990.41
1626.61
22

Other Income
223.25
143.30
56
598.41
429.19
39

PBDIT
798.04
599.90
33
2588.82
2055.80
26

Interest
15.10
3.25
365
37.63
20.39
85

PBDT
782.94
596.65
31
2551.19
2035.41
25

Depreciation / Amortization
82.20
64.07
28
271.36
285.42
-5

PBT Before EO
700.74
532.58
32
2279.83
1749.99
30

EO
0.00
0.00
0
0.00
0.00
0

PBT After EO
700.74
532.58
32
2279.83
1749.99
30

Tax^
201.14
163.01
23
705.36
560.94
26

PAT before PPA
499.60
369.57
35
1574.47
1189.05
32

PPA
0.00
0.00
0
12.49
0
0

PAT after PPA
499.60
369.57
35
1561.98
1189.05
31

EPS *
69.2
51.2

54.5
41.2


*Annualised on current equity of Rs 144.46
Face Value of Rs 5
EO: Extraordinary item
EPS is calculated after excluding EO and relevant tax
Figures in Rs crore
Source: Capitaline Corporate Databases