Friday, April 26, 2013

Avoid Maruti Suzuki at any price above 1300

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:
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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:

Revenue: 4500crores
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.

2 comments:

  1. Just look at the kind of slowdown company has witnessed in April 2013...

    Automobile manufacturers continue to feel the heat of slowdown in sales. Maruti Suzuki’s Unit sales in the month of April 2013 declined to 97,302 units compared to 119,937 units sold in the month of March 2013. The company sales even came lower than what it had sold in the month of April 2012 (100,415 units).

    The decline in sales month-on-month was in the back of passenger car sales declining 16.8% as export declined 44%. While on year on year basis the passenger car sales were up 4.9% the decline in sales of utility vehicles and van coupled with 33.3% decline in exports led to overall sales declining 3.1% y-o-y

    All passenger car segments right from Mini to compact, super compact, mid-size and Executive have seen a decline over previous month. Thus the passenger car sales at 76,509 came 16.8% lower compared to 91,896 units sold in the month of March.

    The global slowdown has taken toll on exports. While the company had exported 12,047 units in the month of March, the exports declined to 6,779 units in April. On year-on year basis too, the exports declined 33.3%.

    The sales of Vans too is seeing a major decline. While it sold 9,506 units in March, the sales decline to 8,696 units of vans in April. On year-on-year basis the sales have slumped 25.8%. The utility vehicles sales too have been taking a beating. At 5,318 units in April the sales were much lower than 6,488 units in March.

    Source: Business Standard

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  2. INR to YEN has collapsed to 1.64 from 1.87 levels... So all the talks of margin expansion due to cheaper imports from Japan is out of the window. The collapsed from 1750 to 1450 in matter of a month. Consumer demand is being hammered and competition is going to eat the company's market share over next 2 years. Continue to avoid the stock until valuation reaches attractive levels...

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