Three significant reasons for being bearish on Maruti Suzuki in spite of optically good Q4 Fy-13 results.
1. Merger of Suzuki Powertrain with MSI is EPS negative and very bad deal for existing MSI shareholders:
Here is how:
Suzuki Power train has been merged with MSI at very expensive enterprise valuation of more than 2000 crores. Before merger Suzuki had 70% stake in the company while rest 30% was held by Maruti. Financial of Suzuki Power train is as follows:
Net profit: 150 crores
Debt: 500 crores
Revenue, profit share and royalty for MSI before merger on account of 30% stake:
Revenue: 1250 crores,
Net profit: 45 crores,
Royalty payment (5% of 1250): 62 crores approx.
After merger the company will have to pay royalty on 4500 crores and will also have to service the debt of 500 crores. So the financial implication after merger is:
Revenue: 4500 crores
Net profit: 150 crores
Royalty Payment: 225 crores
Net loss: 75 crores
Also on account of merger the company has issued fresh equity of 1.317 crore shares which results in equity dilution of around 5%. With around 3% dilution in EPS due to loss it will have to incur on Suzuki Powertrain, net dilution to EPS in our view is at least 8%. Suzuki Motors have been very smart in jucing out MSI and has increased royalty payment in past. Now with this merger they have managed to increase their own cash flow by 160 crores in terms of additional royalty payments and increase their share in company by additional 2%. I think one should look at Suzuki Motors shares instead of MSI.
2. Very poor dividend yield and expensive valuations
Another reason for us to go bearish on the stock is the minuscule dividend yield. Inspite of optically very good Q4 profits, the company announced a dividend of just Rs 8 per share.
Dividend Yield at CMP of 1670 = 0.48%.
Such low dividend yield in the wake of stagnating PV demands provide very little safety to MSI shareholder. Above that at CMP of 1670 the stock is valued at more than 20 times FY-14 earnings considering an optimistic estimation of around 2500 crores of Net profits in the coming year. If demand slows down significantly and company has to push sales through increased discounts the net profit figures could be significantly lower in FY 14. The risk from yen appreciation is also there. So all in all there are lot of headwinds for the company's EPS in FY-14.
3. Shaky demand outlook for cars specially diesel cars where the company has increased it share significantly
The partial deregulation in diesel prices has affected the sentiments of diesel car buyers significantly. Above that the fall in petrol prices are making people buy petrol cars. Now in our view this is negative as the company has invested significantly in Diesel car manufacturing since past 3-4 years and Diesel cars now account for significant share of MSI sales. Interest rates are headed lower for sure in next 1 year but the way CPI inflation has held, RBI has very little room for aggressive rate cuts.
Beside all the above factors one very different observation that is visible is the impact of slowdown in IT sector on overall PV demand in India. IT companies have reportedly cut back on hiring plans and have also reduced incentive payouts. The hike in salaries are also going to stay in the range of 5-7 percent which is half of Consumer inflation. One cannot deny the fact that the real estate and cars boom in India was majorly created by IT employees in past 6-7 years. Now IT sector slowdown will have major impact on Maruti Suzuki as it is the largest PV car manufaturer in India.
So all in all we at InvestorZclub believe that there is no point in staying with the stock given the rich valuation and shaky demand outlook.