The FY2009 performance of Maruti Suzuki India Ltd (MSIL), like other players in the automobile (auto) industry, was affected by the slowdown in the sales volumes and the sharp rise in the cost of raw materials.
However, the company outperformed the passenger car industry with its domestic sales volume growing by 1.5% (against the industry growth of 0.1%) and its overall volumes (including exports) growing by 3.6% year on year (y-o-y).
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MSIL reported a 14% increase in its net sales mainly due to a richer product mix and better realization. During FY2009, the operating profit margin (OPM) was marred by a huge jump in the price of commodities, which translated into a significant increase in the raw material cost for the company. Also, the depreciating Indian Rupee and the strengthening Japanese Yen had a huge impact on the company’s cost and the import content of its vendors.
For FY2009, MSIL registered a whopping 32.1% growth in its export volumes with the launch of A-Star as the new Alto in Europe. Towards the end of FY2009, some countries like Germany, Italy and France announced scrappage benefits on old cars that revived car sales in these markets, thus benefiting MSIL.
MSIL continues to deliver robust sales volumes with the year-till-date (YTD; April-August 2009) growth at 25.3%. Also, the company’s mainstay segments, ie the A2 and the A3 segments, have performed exceptionally well.
We believe that the company’s strong focus on the passenger car segment and the healthy demand environment in the auto sector will lead to a robust volume growth. We also expect the revenues and profitability of the company to be driven by a favourable change in the product mix and a higher realization from the exports.
In addition, the improving macro environment—in the form of a significant liquidity flow into the system—will lead to a strong performance by the company.
We are fine-tuning our estimates for the company to factor in the details of the annual report. Accordingly our FY2011 estimates increase by 4.1% while our price target stands revised to R1,676.
At the current market price, the stock is trading at 19.8x it FY2011E earnings of Rs83.8 and an enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) of 12.7x.
Thus, though the company’s prospects look good, considering its stock’s steep valuations we maintain our HOLD recommendation on MSIL. However, MSIL remains our top pick in the auto sector.