Maruti 4qfy08.pdf

Maruti Suzuki India Ltd
In line with expectations
Result Update
Maruti’s 4QFY08 operating performance was in line with our estimates, adjusting for
28tH April 2008
MTM loss provision on its forex derivatives and the one time expense of Rs 545 mn,
representating compensation to dealer. The MTM provision is with respect to forward
cover for its European exports (commencing in 4QFY09) and ECB borrowings. The
company has charged higher depreciation in 4QFY08 as the company shortened the
life of certain assets, in line with changing dynamics of the industry. This coupled with
extraordinary items resulted reported net profits of the company registered a decline of
33.6% to Rs 3 bn. Adjusting for extraordinary items, the company has reported a net
profit of 4.8 bn, which is in line with our estimates.
With the change in depreciation policy, the company is now more or less par with the
Sensex - 17126
Suzuki Motor Co, except for difference in the method of depreciation. Maruti follows
SLM method where as Suzuki follows WDV method. What surprised us was the sudden
change in depreciation policy and also the timing of the same. The change in policy
has come immediately after the change in top management (which has raised concerns
during the transition phase). In our view, the surprises of the 4QFY08 are likely to
create an overhang on the performance of the stock in the short term. The key triggers
to the stock are good set of volume numbers and 1QFY09 results.
Price Performance
We have downgraded our earnings estimates to factor in the change in depreciation
policy and the cautious stance of the management on the industry growth. As a result,
there is a sharp deceleration in our EPS estimates and the stock appears expensive on
PE basis. At current price of Rs 737, the stock trades at a PE of 11 times and 9.6 times
our FY09 and FY10 EPS estimates of Rs 67.9 and Rs 77.5 and EV/EBIDTA of 6.4 times
and 5.2 times respectively. We are lowering our price target to Rs 1,000 to factor in
lower volume growth and rising pressure on profitability. At our target price the stock
Stock Details
trades at PE of 14.7 and 12.9 times for FY09 and FY10 respectively and EV/EBIDTA of
9.2 times and 7.5 times for FY09 and FY10 respectively. We maintain our BUY on the
Realizations drive the performance
Maruti registered a 1.2% YoY growth in volumes to 202435 units in 4QFY08. However, net sales grew by 8% YoY to Rs 47.8 bn on account of significant improvement in average realizations. Average realizations registered an improvement of 7% YoY to Rs 236,321 per Better Product mix aiding realizations growth
Shareholding Pattern (%)
(3ist Dec’07)
Improving product mix has aided the realization growth. The company had taken a pricing action of around 1% to 1.5% in 4QFY08. Apart from rising sales of new launches, there is higher demand for Via and Six models. But for the capacity constraints at its Manesar plant, Product mix %
4QFY08
4QFY07
3QFY08
Chirag Shah
C-6, Ground Floor, Paragon Center Pandurang Budhkar Marg, Worli, Mumbai – 400 013. India M A R U T I S U Z U K I I N D I A L T D
Result Update
Extraordinary items dent EBIDTA growth
EBIDTA declined by 13.5% YoY to Rs 4.8 bn in 4QFY08, against our estimate of Rs 5.8 bn. MTM losses of Rs 505 mn and Dealer compensation of Rs 545 mn affected EBIDTA. The MTM loses pertains to forward cover that company has taken for its European exports (likely to commence in 4QFY09) and ECB borrowings. Adjusting for the two items, the EBIDTA stood at 5.8 bn (in line with our estimates). The compensation to dealers pertains to reduction in the retail prices post the excise duty cut announced in the budget for the inventory held by them on 29th February 2008. Company claims that MTM losses are book entries and pure hedge transaction rather than speculation. The provision is made to company with the accounting standard - 30 on Financial Instruments. Net Profits nose dives due to accelerated depreciation
In 4QFY08, the company resorted to accelerated depreciation on some of its assets. Its revised the estimated useful life of certain plant and machinery from 13 Years to 8-11 Years. dies and digs from 5 Years to 4 Years and electronic data processing Equipment from 6 Years to 3 Years. As a result an additional charge of Rs 2123 for FY08 which was accounted As per the management, with the change in depreciation policy, the company is more or less in line with the policy of Suzuki Motor Co., except for the methods of depreciation. Suzuki follows WDV method, where as Maruti follows, SLM method. Based on a comparison of the depreciation policy of Maruti, Tata Motors, Ashok Leyland and M&M, it appears that Maruti follows an aggressive. Infact, the move of the company will raise question for other players with respect to their depreciation policy. Given below is the depreciation rate for plant and machinery and schedule XIV of companies act and the policies Schedule XIV rates (%)
Depreciation policy for plant and machinery (based on AR 2006-07) • Maruti –Plant and Machinery at 7.31% and 11.88% on single shift and double shift respectively. We believe that company has further increased the depreciation rates • Tata Motors – Depreciation at schedule XIV rates i.e. 4.8% and 7.4% for single and • M&M – Certain items of plant and machinery (individually costing more than Rs 5000) over the useful life (2 years, 3 years, 5 years, 7 years as the case may be). • Ashok Leyland – Over the estimated life of the assets or Schedule HIV, which ever is What surprised us was the sudden change in the depreciation policy as well as the timing of the same. The change in policy has come after a change in the management. Also, recently, Maruti has created a new management structure, dividing the organization in to six verticals head by a Japanese expatriate (also being a board member) and a local professional. M A R U T I S U Z U K I I N D I A L T D
Result Update
Revision in estimates
Considering the cautious stance of the company at the industry level due to rising inflationary concerns, we have lowered our volume estimates which are summarized below. Also, we have factored in the change in the depreciation policy in our numbers. We have downgraded our indus try growth estimates by 130 and 110 bps for FY09 and FY10 respectively. For Maruti we have revised our volumes growth estimates by 250 and 100 bps for FY09 and FY10 respectively. Also, we have factored in higher pressure on profitability in FY09 due to higher raw material prices and the lower probability of the pass on of the same due to inflationary pressure in the economy (thereby affecting demand) and competition. Volume Summary
Industry
Valuation and View
Adjusting for the extraordinary items and change in depreciation policy, the company has performed in line with our estimates. We believe that there is no change in the operating matrix of the company (EBIDTA and cash flow generation). However, higher depreciation charge has suppressed the EPS estimates by Rs 6.4 mad Rs 7.7 for FY09 and FY10 As a result of aggressive depreciation charging policy, the stock appears expensive on PE basis. However, there is not any significant change in the valuation based on EV/EBIDTA and Cash PE basis. At current price of Rs 737, the stock trades at FY09 and FY10 EV/EBIDTA multiple of 6.4 times and 5.2 times respectively. We maintain our buy rating on the stock. However, we have revised our price target to factor in lower growth and rising pressure on profitability. Also, we are downgrading our FY 10 target valuation EV/EBIDTA multiple by 12% to 7.5 times. We recommend a BUY on the stock with a target price of Rs 1000. M A R U T I S U Z U K I I N D I A L T D
Result Update
Quarterly and annual results summary
Rs mn
Net Sales
Operating Expenses
Net Profit
Adjustment Summary
Adjustments
Adjusted EBIDTA
Net Profits
Adjustments (Post tax)
Adj Net Profits
Adj EPS*
15.5
16.6
65.7
* before factoring in the change in the depreciation policy M A R U T I S U Z U K I I N D I A L T D
Result Update
Profit & Loss Account
Balance Sheet
Net Sales
Operating Expenses
Owned Funds
Loan Funds
Deffered Tax Liability
13
13
12
12
Net Block
Investments
Net Profit
Current Assets
Current Liabilities
Net Current Assets
Cash Flow
Valuation Summary
Per Share Data
Valuation ratio
Cash from operations
Retun Ratios (%)
Cash from Investing
(24,368)
(19,543)
(11,409)
(16,789)
Cash from financing
Other key ratios
M A R U T I S U Z U K I I N D I A L T D
Result Update
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