Result Update on Maruti Suzuki for 4QFY2011

For 4QFY2011, Maruti Suzuki (Maruti) reported better-than-expected results, led by volume growth, gratuity provision write-backs and lower tax rate. We revise our volume estimates marginally downwards to account for the impact of rising interest rates and product prices. Thus, we recommend Accumulate on the stock.

Operating performance better than estimates: For 4QFY2011, Maruti reported 19.8% yoy and 6.3% qoq growth in net sales to `10,092cr (`8,425cr), slightly better than our estimates, aided by a 19.5% yoy and 3.8% qoq jump in volumes and a marginal increase in average net realisation. Maruti benefitted from
better-than-expected performance on the operating front. EBITDA margin declined by 318bp yoy to 10% due to higher raw-material expenses (up 129bp yoy) and other expenditure (up 173bp yoy). However, the company’s margin benefitted due to the change in accounting policy related to vendor tooling (reduced raw-material expenses) and write-back on gratuity provisions (lower employee costs). Adjusting for these items, operating margin would come at 9.5%. Net profit came in at `660cr, recording a marginal increase of 0.5% yoy, boosted largely because of benefits on R&D spends, resulting in lower tax rate.

Outlook and valuation: We expect Maruti to register a 12.1% CAGR in volumes, leading to a 15.7% increase in revenue over FY2011–13E. We estimate the company’s bottom line to grow at a 12.6% CAGR during the same period.
At `1,327, Maruti is trading at 14.7x and 13.2x FY2012E and FY2013E earnings, respectively. We recommend Accumulate on the stock with a target price of `1,506, at which level it would trade at 15x FY2013E earnings.