We have downgraded our estimates for Maruti Suzuki India Limited (MSIL) and subsequently revised our rating.
We have also lowered our estimates to take into account the greater-than-expected fall in volumes resulting from the slowdown in the domestic economy and the cautious lending policies being adopted by the banks due to the global financial turmoil.
This is clearly evident from the 8% y-o-y decline in Company’s domestic sales volume in October, despite it being the festive season.
We believe that MSIL’s A1 & A2 segments will be badly affected by the prevailing adverse market conditions and the launch of Tata Nano.
However, the upcoming new product launches, such as ‘A-Star’ in late November and ‘Splash’ in April 2009, should restrict the fall in volumes.
Further, with the expected implementation of the Sixth Pay Commission’s recommendations and interest rates likely to come down due to the cut in the CRR and repo rates, demand is expected to improve. Overall, we estimate MSIL’s sales volume to decline by 2-3% y-o-y in FY09 and FY10.
We expect the EBITDA margin to improve in FY10. This is because prices of commodities such as steel and aluminium have started to decline, and this should provide an impetus to the margin.
At the current market price of Rs549.8, MSIL’s stock is trading at a forward P/E of 10.9x and 14.3x for its FY09E and FY10E earnings, respectively.
We have valued the company by using the DCF method. Using a WACC calculated at 14% and a terminal growth rate of 5%, we have arrived at a target price of Rs630. Hence, we downgrade our rating on MSIL’s stock to HOLD.