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Macro Pressures Easing: CLSA - Maruti

CLSA analysts retain their "buy" rating for Maruti Suzuki, as several macro pressures that have weakened the company's operational outlook are starting to ease. Rising fuel and input costs, a weakening rupee, and high financing rates had hurt Maruti, but fuel and metal prices are now falling while the rupee has strengthened recently. Margins may remain under pressure in the current quarter due to discounts and currency effects, but are expected to improve as demand and commodity costs gradually recover.

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Anuj Saxena
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44 views

Macro Pressures Easing: CLSA - Maruti

CLSA analysts retain their "buy" rating for Maruti Suzuki, as several macro pressures that have weakened the company's operational outlook are starting to ease. Rising fuel and input costs, a weakening rupee, and high financing rates had hurt Maruti, but fuel and metal prices are now falling while the rupee has strengthened recently. Margins may remain under pressure in the current quarter due to discounts and currency effects, but are expected to improve as demand and commodity costs gradually recover.

Uploaded by

Anuj Saxena
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CLSA - Maruti - Google Groups Page 1 of 2

Google Groups

CLSA - Maruti

research.vasanth 03-Dec-2018 12:00


Posted in group: err-club

Macro pressures easing


Oil, rupee and metal pressures starting to ease; retain BUY
Maruti’s operational outlook had weakened in recent
months led by rising fuel prices, increase in financing
rates, a weakening INR and high input costs. Most of
these factors are now easing on the margin with fuel and
metal prices coming off from the peak and the INR
showing some strength of late. Festive demand was
subdued this year but we expect a gradual recovery ahead
with ownership costs tapering off. Margins are likely to be
weak in 3Q due to high discounts and full FX impact but
should improve going forward. The stock is down 23%
from the peak and now trades at a 23x 1Y forward
consensus PE – in-line with past four
years’ average. We cut FY19-21CL EPS by 3% but
retain BUY with a Rs9,200 TP.
Cost of vehicle ownership starting to ease with fuel prices
coming off
The sharp rise in fuel prices and higher financing rates had
pushed up the cost of vehicle ownership in recent months, which
weakened India’s passenger vehicle (PV) demand outlook. Global
crude prices rose ~30% over Jan-Oct but have since
corrected ~33%, which should easevehicle ownership
costs. Festive season PV demand was muted and Maruti
witnessed a low-single-digit YoY growth in retails in the period
but we expect demand to gradually recover in coming quarters.
Cost pressures alleviating as metal prices correct; INR
showing some strength
After two years of rally, global steel and aluminium prices have
corrected 22-24% from recent peaks due to weaker demand
outlook and benign winter supply cuts in China. This should
benefit Indian auto companies, which were seeing a sharp rise in
input costs since mid-2016. The sharp INR depreciation in 2018
has also been a headwind for Maruti. Its gross FX exposure from
imports and royalties is ~21% of sales, which can be only partly
offset by exports (6-7% of volume). The rupee
had depreciated 12-17% vs its key currencies ¥/US$/€ over Jan-

https://groups.google.com/forum/print/msg/err-club/t2MyPT24yMo/HPTzRNXSBAAJ... 12/3/2018
CLSA - Maruti - Google Groups Page 2 of 2

Oct but has since appreciated 6-7%, resulting in currency


pressure coming off too.
Margins likely to be under pressure in 3Q but should
improve going forward
Maruti’s 3Q margins should be under pressure as discount levels
have risen on subdued demand and the full impact of
the INR weakness should flow in the quarter. 3Q wholesales
might also be muted if Maruti needs to correct dealer stocks
post a muted festive season. However, we
expect margins to improve subsequently as demand picks up and
commodity pressures taper off.
Retain BUY
We cut 19-21CL EPS by 3% on slightly lower volumes post muted
festive retails. While we still see some near-term headwinds for
Maruti, we see macro pressures easing sequentially. The stock is
down 23% from its LTM peak and trades at 23x 1Y fwd consensus
PE (23x 20CL), in-line with the past 4Y average. Retain BUY.
Key risk is a sharp rise in oil prices which could hurt demand and
weaken the INR.

Financials
Year to 31 March 17A 18A 19CL 20CL 21CL
Revenue (Rsm) 680,348 797,627 880,951 1,004,977 1,143,494
Net profit (Rsm) 73,377 77,218 83,808 99,097 113,954
NP forecast change (%) - - (3.3) (3.2) (3.0)
EPS (Rs) 243.0 261.2 277.5 328.1 377.3
CL/consensus (41) (EPS%) - - 97 97 99
EPS growth (% YoY) 60.5 7.5 6.3 18.2 15.0
PE (x) 31.1 29.0 27.3 23.1 20.0
Source: www.clsa.com

https://groups.google.com/forum/print/msg/err-club/t2MyPT24yMo/HPTzRNXSBAAJ... 12/3/2018

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