| | | | | Buy (Price target Rs6,000.00) | | UBS Research THESIS MAP | a guide to our thinking and what's where in this report | | | Q: Will demand surge with the implementation of GST and the 7th Pay Commission, causing volume to spike in FY18 and FY19? Yes, we estimate implementation of the 7th Pay Commission will boost demand; this demand accounts for about 7%/6% of our FY18/FY19 domestic volume estimates. We expect a 4-6% cut in car prices in FY17 (subject to the final GST rate); this could further boost demand in a strong economic growth scenario. We also think OEMs could retain 100–200bps of pricing benefits on average, which would support margins in FY18. more→ Q: Is Maruti successfully premiumizing? Yes. We expect Maruti's top line to grow at a 17% CAGR over FY15-20E, driven by a 13% volume CAGR and strong growth in ASPs with the improving model mix and rising content per car. "Premiumization to drive re-rating" 1/14/2016→ Q: Will Maruti retain its market share over the medium to long term? Yes. We believe Maruti has built a strong eco-system in India on its wider network, high dealer profitability, low-cost after-sales services and good resale value. Its strong new model launches and trusted brand equity should also enable it to maintain its 45% market share over the next five years. "Premiumization to drive re-rating" 1/14/2016→ | | We remain positive on Maruti as we expect strong volume growth in FY18-19E, driven by implementation of the 7th Pay Commission and GST. We expect valuation multiples to remain at the present level, as Maruti has demonstrated its ability to keep up with the premiumization of car demand and has increased its market share in higher-priced segments. | | Our analysis of industry volumes by price point indicates Maruti has improved its market share in higher price segments over FY10-15. Maruti's new launches, the Baleno and Vitara Brezza, have received a strongly positive market response and there is a long waiting period for both models. | | The present valuation of 22x one-year forward PE is in line with the average over the past two years. While significantly above its long-term averages, we believe current multiples are sustainable given upcoming catalysts—the 7th Pay Commission and GST. We are 7% above consensus EPS for FY18. more→ | | 
Value drivers | Domestic vol.
growth in FY18E | EBITDA margin improvement in FY18E | ASP
growth in FY18E | Rs7,300 upside | 30% | +150 bps | 7% | Rs6,000 target | 20% | Base case: 14.1% | 5% | Rs3,855 downside | 15% | -100 bps | 3% | Source: UBS estimates | | | |
more→ | | Maruti Suzuki India (Maruti) is the largest passenger car company in India in terms of sales volume. It has a strong presence in the small car segment with well-recognised models... more → |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Will demand surge with the implementation of GST and the 7th Pay Commission, causing volume to spike in FY18 and FY19? UBS VIEW Yes, we estimate implementation of the 7th Pay Commission will boost demand; this demand accounts for about 7%/6% of our FY18/FY19 domestic volume estimates. Furthermore, we expect a 4-6% cut in car prices in FY17E (subject to the final GST rate); this could further boost demand in a strong economic growth scenario. We also think OEMs could retain 100–200bps of pricing benefit from the lower tax rate on average, which would support margins in FY18E. EVIDENCE Maruti's strong small car portfolio means it is well placed to benefit from new first-time buyers, including government employees benefiting from the 7th Pay Commission. About 70% of Maruti's volume growth in FY08-10 was driven by increased car demand from government employees after the last pay commission. Our analysis shows that the impact of tax cuts on car demand growth has been inconclusive in the past. We believe underlying economic growth remains a more important factor. WHAT'S PRICED IN? We believe consensus estimates have not built in the potential upside from the 7th Pay Commission. We are 7% ahead of consensus EPS for FY18. |
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Pay Commissions: a significant boost to demandWe estimate 7th Pay Commission implementation will boost demand for Maruti by about 115,000 units pa in FY18-19
(about 7%/6% of our FY18/FY19 domestic volume estimates) Pay revisions for India central government employees occur every 10 years (at least since the 1980s). A Central Pay Commissions is constituted to look into the pay of central government employees and recommend changes. The CPC submits its report after extensive study and discussions. These recommendations then set the tone for pay revisions of state government employees and therefore have an impact extending well beyond central government employees (central government includes railways and defence). The pay revisions for central government employees have been due since January 2016. The 7th Central Pay Commission submitted its report in November 2015. The government notified salary increases in July 2016, and the revised salaries will be paid out starting from August 2016. Allowances will be announced later. In FY15, government employees, including central government, state government and defence employees, accounted for 17% of Maruti sales. We believe Maruti remains well placed to benefit from the implementation of the 7th Pay Commission recommendations given its well-known brand, strong entry and mid-level vehicle portfolio and pan-India presence with a deep network. We therefore expect Maruti to have a 60% market share with government employees. We estimate 7th Pay Commission implementation will boost demand for Maruti by about 115,000 units pa over FY18-19, accounting for about 7%/6% of our FY18/FY19 domestic volume estimates. We have used data from the income distribution of central government employees (including railway employees) to estimate the potential increase in demand from the implementation of the 7th Pay Commission recommendations. Given the lack of data on the income distribution of state government and defence employees, we have doubled our central government estimate to calculate overall demand. While there are four times as many defence and state government employees as central government employees, we have conservatively assumed only a 2x increase. We are also not taking into account any effect of potentially faster replacement demand from existing car owners among government employees. Figure 1: Breakdown of government employees | | Figure 2: Sales to government employees as a percentage of Maruti's domestic sales | 
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| Note: Historical average growth rates used to estimate latest employment for states, local bodies and SOEs.
Source: Budget documents, CEIC, World Bank, Department of Public Enterprises, Reserve Bank of India | | Source: Company data |
Figure 3: Estimated annual salary increase of central government employees | 
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Source: Government documents, UBS estimates But no repeat of FY10 and FY11Following the implementation of the 6th Central Pay Commission recommendations, there was a sharp increase in car demand from government employees. About 70% of Maruti's incremental volume growth over FY08-10 was from government employees. However, we expect the impact of the 7th Pay Commission to be much lower. Furthermore, the base of Maruti’s sales to government employees has increased significantly. The 6th Central Pay Commission was implemented in August 2008 (FY09) although salary revisions were due from 1 January 2006; as a result 32 months of arrears were also due to government employees. The arrears were paid in two instalments with 40% being paid in FY09 and the remaining 60% in FY10. This led to very large lump sum payments being paid to central government employees in FY09 and FY10. As a result, sales to government employees (including state government and defence forces) surged sharply after the implementation and payouts of arrears in FY09-11. The real increase in government salaries in the 6th Central Pay Commission was also substantially larger, at 35-40%, compared to the 15% real increase in salaries (ex-allowances) recommended by the 7th Pay Commission. Given the lower salary increase and smaller arrears (seven months as opposed to 32), we expect the demand surge to be much more limited. Figure 4: Maruti and industry growth, FY08-16 | | Figure 5: Maruti's market share by segment, FY16 | 
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| Source: Society of Indian Automobile Manufacturers | | Source: Society of Indian Automobile Manufacturers, UBS |
Our strategist remains cautious on potential boost to consumption from the Pay CommissionOur Indian strategist Gautam Chhaochharia believes a boost to consumption from the 7th Pay Commission is not a given (neither is it likely to be sustainable beyond two to three quarters) and could disappoint, especially as implementation will be diluted/staggered, and implementation could occur without any fiscal expansion, per se. Historically, these pay hikes have had a larger impact on savings than consumption; the exception was FY09, when a broader fiscal/rural stimulus and the large arrears component in the pay revision played a role in boosting consumption. (See India Market Strategy: Big boost from Govt wage hike expected but will likely underwhelm, published 3 September 2015, for a more detailed discussion on implications of the 7th Pay Commission.) GST: implementation a structural positiveThe introduction of a GST is a comprehensive reform that aims to replace most of the plethora of indirect taxes (at central and state government levels) with a single tax. It is an integrated tax regime that gives credits for all taxes paid earlier in the goods/services chain, reducing the current cascading impact of tax. However, the reform has been delayed over the last few years, frustrating investors. We expect increased compliance and a higher tax on services due to a single GST rate to bring down taxes for the manufacturing sector, as the GST will replace various taxes including excise duty, VAT, central sales tax (CST), and Octroi. This is particularly beneficial for cars, which are currently heavily taxed. We expect taxes on cars to be lower as a result of GST implementation. This will improve affordability over the medium term for cars. We expect an average 4-6% price cut for small cars, assuming a GST rate of 20-22%. Since there is no clarity on the GST rate for larger cars (above 4 metres in length), we are not sure what sort of benefits will eventually flow through to the consumer. However, we do expect larger cars to be taxed at a higher GST rate. Also, as we discuss below, based on historical evidence it is not certain demand will increase due to a price cut. We believe economic growth momentum remains a more important factor than a 3-4% increase or decrease in price. That said, we believe price cuts due to the implementation of GST will further support premiumization and profitability, as customers are likely to go for higher specifications or upgrade to a higher segment vehicle if possible. We therefore expect growth to be higher in mid-priced segments like compact SUVs and premium sedans. We also believe GST implementation will enable OEMs to retain some of the benefits from the reduction in tax rates. However, given the competitive environment, we believe this is likely to be restricted to 100-200bps at best. No clarity yet on GST rate for cars Finally, there is no clarity on what the national GST rate will be or the rate for various categories of automobiles, ie small cars, large cars etc. It could well be that cars will be taxed at a higher rate under the GST regime than we estimate in the current analysis. Figure 6: Breakdown of car pricing in India A | Ex-factory price | Comments | +1 | Excise duty | 12.5-30% | +2 | Infrastructure cess* (introduced in Budget 2016) | 1-4% | +3 | VAT | Varies from state to state (12.5-14.5%) | =B | Ex-showroom price | | +4 | Road tax, registration and insurance charges | Varies from state to state | =C | On-road price | |
*A levy/tax imposed on the production of vehicles.
Source: UBS Figure 7: Current excise duty rates Vehicle type | Excise duty | Infrastructure cess | Small petrol/CNG/LPG cars (sub-4m and <=1200 cc engine) | 12.5% | 1.0% | Small diesel cars (sub-4m and <=1500 cc engine) | 12.5% | 2.5% | Hybrid vehicles (incl. mild hybrid) | 12.5% | 0% | Large vehicles (all others except exempt and above two categories) | 24-30% | 4.0% |
Source: Budget documents, UBS How much will demand improve in FY18?As the table below shows, economic growth momentum has been a more important factor in driving overall car demand than changes in tax rates. In FY15, there was no material positive growth despite a 4% cut in excise duty, while in FY16 demand has been stronger despite the reversal of the excise duty cut. However, a more material price cut of 5% or higher could potentially boost car demand more meaningfully in FY18 and beyond. Figure 8: Impact of changes in excise duties and GDP growth on car demand Impacted year | Change in excise
duty (small cars) | Change in excise duty (large cars) | PV volume | PV growth | GDP growth | FY07 | -8% | 0% | 1,379,203 | 21% | 9.6% | FY09 | -4% | 0% | 1,552,543 | 0% | 6.7% | FY10 | -4% | -4% | 1,950,015 | 26% | 8.6% | FY11 | 2% | 2% | 2,501,542 | 28% | 8.9% | FY12 | 0% | 0% | 2,618,072 | 5% | 6.7% | FY13 | 2% | 2% | 2,686,429 | 3% | 5.6% | FY14 | 0% | 0% | 2,503,851 | -7% | 6.6% | FY15 (Q1-Q3) | -4% | -4% | 2,601,236 | 4% | 7.2% | FY16 | 4% | 4% | 2,789,678 | 7% | 7.6% |
Source: Government documents, Society of Indian Automobile Manufacturers, CEIC Figure 9: PV sales growth versus GDP growth | 
| Source: CEIC, Society of Indian Automobile Manufacturers, UBS estimates |
How much could prices be cut? Can OEM's benefit? Broadly, we expect a 4-6% cut in car prices as a result of the implementation of GST (assuming an underlying GST rate of 20-22%), and we assume that OEMS will retain 100-200bps of pricing benefit from the lower tax rate, on average. While it is difficult to estimate the benefits that OEMs might be able to realise, we believe the intense competitive pressure in the marketplace means manufacturers are likely to pass on most of the benefits from the reduction in tax rates to customers. The potential price cut will depend on two factors: the actual GST rate and the current taxes the OEM is paying on the model. The higher the GST rate, the more limited the room for OEMs to retain any benefits from the lower tax rate. This would also mean a much more limited price cut for the consumer. The amount of tax paid by model level is complicated, since different models have different levels of infrastructure cess and taxes vary based on whether the OEM needs to pay CST and the level of VAT in each state. The price cuts following GST implementation will therefore be different across models and locations. However, the market remains competitive in all segments. We think smaller OEMs who are trying to gain market share might pass on all or most of the benefits to consumers. This would force other OEMs to respond. We therefore do not expect OEMs to keep more than 100-200bps of the benefits on average, with the rest being passed on to consumers. However, the level of benefits retained is likely to vary across models. Auto OEMs are highlighting the cost pressures from upcoming safety norms and other regulatory changes. It seems to us that OEMs might retain some benefit from the tax cuts to offset future cost pressures. This could further boost margins in FY18, albeit temporarily. Figure 10: Potential price cuts for a small car with a GST rate of 20% Current scenario | w/ CST | w/o CST | | GST scenario | | Excise duty rate | 12.50% | 12.50% | | Excise duty rate | 0.00% | Infra cess (0-4%) | 2.00% | 2.00% | | Cess | 0.00% | CST | 2% | 0% | | CST | 0% | Transportation cost | 2% | 2% | | Transportation cost | 2% | Dealer gross margin | 4% | 4% | | Dealer gross margin | 4% | VAT | 12.50% | 12.50% | | GST | 20.00% | | | | | OEM retention | 2% | | | | | | | Ex factory | 100.00 | 100.00 | | Ex factory | 102.00 | After excise & cess | 114.50 | 114.50 | | After excise | 102.00 | After CST | 116.79 | 114.50 | | After CST | 102.00 | Transportation | 118.79 | 116.50 | | Transportation | 104.04 | Dealer margin | 122.79 | 120.50 | | Dealer margin | 108.12 | Ex showroom | 138.14 | 135.56 | | Ex showroom | 129.74 | | | | | | | | | | | Benefit w/CST | -6.08% | | | | | Benefit w/o CST | -4.29% |
Source: UBS estimates Figure 11: Potential price cuts on small cars by OEMs paying CST (average infrastructure cess of 2%) With CST | | GST rate | | | 18% | 20% | 22% | 24% | | 0% | -9.5% | -7.9% | -6.4% | -4.8% | Price retention | 1% | -8.5% | -7.0% | -5.4% | -3.9% | by OEM | 2% | -7.6% | -6.1% | -4.5% | -2.9% | | 3% | -6.7% | -5.2% | -3.6% | -2.0% | | 4% | -5.8% | -4.2% | -2.6% | -1.0% |
Source: UBS estimates Figure 12: Potential price cut on small car by OEMs not paying CST (average infrastructure cess of 2%) Without CST | | GST rate | | | 18% | 20% | 22% | 24% | | 0% | -7.7% | -6.2% | -4.6% | -3% | Price retention | 1% | -6.8% | -5.2% | -3.7% | -2% | by OEM | 2% | -5.9% | -4.3% | -2.7% | -1% | | 3% | -5.0% | -3.4% | -1.7% | 0% | | 4% | -4.0% | -2.4% | -0.8% | 1% |
Source: UBS estimates Changing our industry demand forecastWe reduce our domestic passenger vehicle industry growth forecast for FY17 from 15% to 7% given the weaker trend YTD and targeted implementation of GST from FY18. We believe consumers could delay purchase decisions ahead of GST implementation in FY18, and growth in FY17 could suffer as a result, especially until there is more clarity on timelines and rates. We are raising our FY18 growth forecast from 12% to 18%, driven by the boost from the 7th Pay Commission implementation and potential transfer of demand from FY17 to FY18 due to GST implementation. Figure 13: Auto industry volume growth forecasts Units | FY14 | FY15 | FY16 | FY17E | FY18E | FY19E | FY20E | FY21E | Domestic PV | 2,503,851 | 2,601,236 | 2,789,678 | 2,988,127 | 3,517,634 | 3,988,012 | 4,538,265 | 5,219,004 | YoY growth, % | -7% | 4% | 7% | 7% | 18% | 13% | 14% | 15% | | | | | | | | | | Domestic cars | 1,786,987 | 1,877,706 | 2,025,479 | 2,082,400 | 2,408,844 | 2,717,003 | 3,145,144 | 3,629,496 | YoY growth, % | -6% | 5% | 8% | 3% | 16% | 13% | 16% | 15% | | | | | | | | | | UVs only | 526,020 | 552,135 | 586,664 | 726,075 | 893,208 | 1,031,052 | 1,144,725 | 1,321,013 | YoY growth, % | -5% | 5% | 6% | 24% | 23% | 15% | 11% | 15% | | | | | | | | | | Vans | 190,844 | 171,395 | 177,535 | 179,653 | 215,583 | 239,958 | 248,395 | 268,495 | YoY growth, % | -20% | -10% | 4% | 1% | 20% | 11% | 4% | 8% |
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Source: Society of Indian Automobile Manufacturers, UBS estimates How fast can India’s car market grow? Why does Maruti deserve a premium?We believe India's PV market growth potential is immense given the low penetration levels, strong medium-term GDP growth outlook and favourable demographics. There is a strong correlation between income levels and car penetration given the expense of purchasing a car. As India’s economy continues to grow and incomes increase car demand continues to show steady growth. Income growth should drive strong penetration growthAs the chart below indicates, car penetration starts to accelerate as GDP per capita crosses US$6,000 (purchasing power parity (PPP) basis). Based on IMF estimates, India's per capita GDP crossed the US$6,000 level in 2015. The IMF expects India's per capita GDP (PPP) to grow at an 8% CAGR over 2015-21. Using the same growth rate, we expect India’s per capita GDP to cross US$10,000 (PPP) in 2022 (FY23E). Achieving Indonesia’s level of car penetration at a per capita GDP of US$10,000 would imply an FY16-23E PV sales CAGR of 14% If we conservatively estimate India follows a car penetration trajectory similar to Indonesia, reaching 46 cars per 1,000 people at a per capita GDP of US$10,000 (PPP), it implies an FY16-23E PV sales CAGR of 14%. This is broadly in line with our industry forecasts. Figure 14: Auto penetration (cars per '000) versus per capita GDP (US$ PPP adjusted, X-axis) | 
| Source: IHS Global Insight, IMF, UBS |
Figure 15: Car penetration versus per capita GDP (US$ PPP) | 
| Data for India, Korea, China, Thailand and Indonesia.
Source: CEIC, IMF, UBS |
Figure 16: Car penetration across emerging markets | 
| Source: CEIC, IMF, UBS |
Figure 17: Growth in car penetration: China | | Figure 18: Growth in car penetration: Indonesia | 
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| Source: CEIC, IMF, UBS | | Source: CEIC, IMF, UBS | Figure 19: Potential volume CAGR required for India to achieve same penetration as Indonesia and China at GDP per capita of US$10,000 (PPP) | 
| Source: CEIC, IMF, UBS estimates |
Achieving China’s level of penetration would imply much stronger growthIn a more positive scenario, if India’s economy was to grow at a much faster pace over the medium term and car ownership was to reach the same level as China (56 cars per 1,000 people) at a GDP per capita of US$10,000 (PPP), it would imply a car sales CAGR of 22% over FY16-23E, significantly above our base-case assumption of a 14% CAGR over the same period. Figure 20: Trend in car penetration (Y-axis) vs. per capita US$ GDP per capita PPP (X-axis) | 
| Source: CEIC, IMF, UBS estimates |
Looking forward to FY25Assuming India’s auto market will grow at a 14% CAGR over the next nine years (until FY25), we look at how Maruti's earnings could grow assuming different market share and profitability scenarios. Maruti is likely to deliver double digit EPS growth in all scenarios, highlighting that the strong underlying structural growth offsets potential downside from weaker margins and a lower market share. Figure 21: Potential Maruti EPS scenarios, FY25E | Assuming an FY16-25E PV industry volume CAGR of 14% | | Market share | EBIT margin | EPS (Rs) | FY16-25E EPS CAGR | Weak scenario | 35% | 7% | 430 | 10% | Base case | 40% | 8% | 532 | 13% | Strong scenario
| 45% | 9% | 648 | 15% |
Source: UBS estimates Suzuki margin guidance should provide medium-term support to Maruti's margin outlookSuzuki management has guided for an operating profit margin of 7% for the group by FY20. Our Suzuki analyst, Kohei Takahashi, believes the company's guidance remains conservative and that management is placing a high emphasis on profitability. (See India growth outlook positive; worst appears behind in Japan, published 31 August 2016.) We believe Suzuki management will look to maintain the current high margins at Maruti in order to help achieve the group target. Maruti remains in a strong competitive position in India and we expect it to comfortably maintain a 45% market share over the medium term to FY20. We therefore think Maruti is in a strong position to exercise pricing power and try to maintain its present margins despite margin headwinds due to the opening of the new Gujarat plant. We believe implementation of GST will also support Maruti's margin in FY18, as the Gujarat plant comes on stream. Figure 22: We expect Suzuki's OPM to rise in the medium term | | Figure 23: We also expect asset efficiency to continue to improve | 
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| Source: UBS estimates | | Source: UBS estimates |
| | | WHAT'S PRICED IN? | return ↑ | 
| Maruti's valuations are in line with other Indian auto and auto component names based on relative earnings growth
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Valuations appear sustainable given upcoming catalysts and long-term outlook Maruti’s current valuation, at 23x one-year forward PE, is in line with the average over the past two years. While this is a significant premium to its long-term average, we believe current multiples are sustainable given the upcoming significant catalysts—implementation of the 7th Pay Commission and GST. We are 7% ahead of consensus EPS for FY18E. The stronger long-term growth outlook for cars given the lower penetration of cars relative to motorcycles should allow Maruti to trade at a premium to mainstream motorbike OEMs Hero MotoCorp (Hero) and Bajaj Auto (Bajaj). Figure 24: Maruti Suzuki: one-year forward PE | 
| Source: Bloomberg |
Re-rating driven by strong performance and improved outlookWe believe the re-rating of Maruti from FY14 has been driven by increased expectations of strong car market growth with a recovery in the Indian economy. While the anticipated economic recovery has not yet come to pass, Maruti has delivered strong earnings growth over the past two years, driven by its improving market share and expanding margins. We believe the present valuations are sustainable, as Maruti remains well placed competitively to retain a 45%+ market share. Maruti screens well versus other domestic auto and auto component peers in terms of valuations (EV/IC) relative to its ROIC. Figure 25: Indian auto and auto component makers: ROIC vs. EV/IC | 
| Source: UBS estimates |
Should trade at a significant premium to Hero and Bajaj Figure 26: Volume growth CAGR (FY16-19E) | 
| Source: UBS estimates |
The lowest salary of a government employee is close to Rs20,000 per month, well above the affordability threshold for buying a motorcycle. The boost in government employees’ incomes due to the Pay Commission is therefore unlikely to trigger any major demand for two wheelers. We believe the stronger long term growth outlook for cars given the lower penetration of cars relative to motorcycles should allow Maruti to trade at a premium to leading motorcycle OEMs Hero and Bajaj. We therefore believe Maruti can trade at a significant premium to Hero and Bajaj on a PE basis. Maruti is trading at a 9% premium to these OEMs. Figure 27: India auto and auto component makers, valuation comparables Company | Rating | Price
target | Price (LC) | Mkt cap | PE | EV/EBITDA | 30-Aug-16 | US$ m | FY16E | FY17E | FY18E | FY16E | FY17E | FY18E | India auto OEMs | | | | | | | | | | | Bajaj Auto | Sell | 2,370 | 2,973 | 12,829 | 21.2 | 20.0 | 18.8 | 11.9 | 14.9 | 14.3 | Eicher Motors Limited | Neutral | 23,000 | 23,044 | 9,313 | 48.9 | 36.2 | 28.2 | 25.0 | 28.9 | 22.0 | Hero MotoCorp | Sell | 2,300 | 3,473 | 10,342 | 22.2 | 20.3 | 18.7 | 14.6 | 13.4 | 12.2 | Maruti Suzuki India | Buy | 6,000 | 5,069 | 22,832 | 27.9 | 24.4 | 20.4 | 11.6 | 13.9 | 11.6 | Mahindra & Mahindra | Suspended | NA | 1,437 | 12,694 | 25.2 | 19.5 | 16.0 | 11.4 | 9.9 | 8.2 | Ashok Leyland | Sell | 71 | 88 | 3,751 | 34.9 | 18.9 | 18.7 | 11.1 | 10.3 | 10.0 | India auto comps | | | | | | | | | | | Apollo Tyres | Neutral | 180 | 184 | 1,385 | 8.4 | 9.4 | 10.5 | 4.9 | 5.7 | 6.1 | Bharat Forge | Buy | 900 | 861 | 2,987 | 30.8 | 29.2 | 23.0 | 17.3 | 15.3 | 13.0 | Bosch | Neutral | 24,500 | 24,750 | 11,588 | 63.7 | 51.2 | 35.4 | 41.2 | 33.7 | 23.3 | Exide | Buy | 200 | 184 | 2,326 | 26.3 | 21.9 | 18.6 | 12.6 | 10.7 | 9.2 | Motherson Sumi | Buy | 356 | 325 | 6,419 | 33.8 | 25.9 | 19.2 | 16.3 | 13.0 | 10.6 |
Source: UBS estimates Strong returns relative to global peers While long-term growth is a key argument for premium valuation multiples relative to global peers, Maruti's superior ROIC also remains a major factor. Maruti generates significantly superior returns on capital than global peers after paying Suzuki a high royalty for the technology received. Secondly, most global auto companies have significant financing operations within the consolidated group. Given the global credit crisis, the pressures on the financial sector have affected valuations for auto companies. Maruti remains a pure auto company with no captive financing subsidiary and therefore is not affected by such risks or the need to infuse capital to expand. Figure 28: Global OEM valuations and return ratios Company | PE | ROIC (%) | ROE (%) | FY16E | FY17E | FY18E | FY16E | FY17E | FY18E | FY16E | FY17E | FY18E | India* | | | | | | | | | | Bajaj Auto | 21.2 | 20.0 | 18.8 | 272.0 | 215.8 | 227.7 | 33.9 | 28.6 | 23.7 | Eicher Motors | 48.9 | 36.2 | 28.2 | 67.3 | 70.6 | 78.3 | 34.2 | 41.4 | 38.3 | Hero MotoCorp | 22.2 | 20.3 | 18.7 | 142.1 | 174.0 | 177.9 | 43.5 | 40.0 | 37.0 | Maruti Suzuki India | 27.9 | 24.4 | 20.4 | 58.1 | 61.9 | 64.7 | 21.0 | 21.1 | 22.0 | Mahindra & Mahindra | 25.2 | 19.5 | 16.0 | 8.9 | 10.2 | 10.9 | 10.3 | 12.7 | 14.0 | Tata Motors Ltd. | 14.0 | 10.7 | 11.0 | 19.7 | 20.2 | 16.3 | 16.3 | 17.2 | 14.3 | Ashok Leyland | 34.9 | 18.9 | 18.7 | 35.3 | 38.4 | 36.7 | 20.9 | 22.7 | 21.0 | Europe** | | | | | | | | | | Daimler | 7.9 | 7.3 | 6.6 | 11.8 | 11.8 | 11.9 | 20.8 | 20.8 | 19.3 | BMW | 8.1 | 7.8 | 8.0 | 13.3 | 12.6 | 11.7 | 17.8 | 18.1 | 16.7 | Volkswagen | (39.5) | 6.6 | 4.8 | (3.1) | 4.8 | 6.1 | 16.9 | 17.0 | 18.1 | Renault | 7.1 | 5.9 | 5.0 | 11.7 | 20.4 | 23.5 | 10.2 | 11.3 | 12.3 | PSA Group | 17.1 | 6.7 | 5.8 | 19.0 | 21.0 | 18.8 | 5.3 | 12.3 | 12.7 | FCA | 23.0 | 3.6 | 3.0 | 7.0 | 6.9 | 6.4 | (0.3) | 10.8 | 11.7 | Japan* | | | | | | | | | | Toyota Motor | 8.3 | 11.7 | 11.7 | 24.5 | 14.8 | 13.7 | 13.6 | 9.0 | 8.5 | Honda Motor | 16.5 | 11.2 | 9.6 | 3.3 | 6.5 | 8.0 | 5.0 | 7.4 | 8.1 | Nissan Motor | 8.0 | 7.6 | 6.4 | 11.3 | 9.9 | 10.9 | 12.9 | 11.4 | 12.3 | Suzuki Motor | 14.3 | 17.3 | 14.4 | 12.2 | 10.5 | 11.7 | 7.7 | 8.6 | 9.5 | Asia** | | | | | | | | | | Hyundai Motor | 4.5 | 4.4 | 4.4 | 11.4 | 9.8 | 9.5 | 10.4 | 9.7 | 8.9 | Kia Motors | 6.4 | 5.5 | 5.4 | 24.1 | 23.7 | 24.3 | 11.3 | 11.9 | 11.0 | Brilliance China Automotive | 13.2 | 13.2 | 10.9 | | | | 19.0 | 16.3 | 17.0 | Dongfeng Motor | 6.2 | 6.4 | 6.2 | | | | 14.6 | 12.6 | 11.6 | Great Wall Motor | 8.5 | 10.6 | 9.8 | 29.7 | 21.6 | 20.9 | 22.5 | 16.0 | 15.5 | Astra International | 22.6 | 19.1 | 16.2 | 12.2 | 11.8 | 12.7 | 19.1 | 16.0 | 16.9 |
*Data for years ended March 2016, March 2017 and March 2018. **Data for years ended December 2015, December 2016 and December 2017.
Source: UBS estimates
| | | UPSIDE / DOWNSIDE SPECTRUM | return ↑ | 
Value drivers | Domestic vol.
growth in FY18E | EBITDA margin improvement in FY18E | ASP
growth in FY18E | Rs7,300 upside | 30% | +150 bps | 7% | Rs6,000 target | 20% | Base case: 14.1% | 5% | Rs3,855 downside | 15% | -100 bps | 3% | Source: UBS estimates | | | |
| Risk to the current share price is highly skewed (1.8:1) to the upside |
Upside (Rs7,300): In our upside scenario, we assume a stronger-than-expected revival in domestic sales in FY18E, driven by a surge in car demand as the industry passes on part of the tax benefits from GST implementation to consumers through 6-7% price cuts, a potential boost from the 7th Pay Commission and a recovery in rural demand. Maruti's strong brand equity and range of successful models should enable it to capture a significant portion of this demand. We therefore estimate domestic volume growth for Maruti of 30% in FY18E (versus 20% in our base case). We also assume EBITDA margin expands by 150 bps and ASP growth of 7% (5% in our base case) in FY18E on Maruti’s improving model mix, partial retention of GST benefits and rising content per car. We would expect the shares to trade at 24x FY18E PE in this scenario, implying a fair value price of Rs7,300. Base (Rs6,000): We are changing our valuation methodology from 9.2x FY18E EV/EBITDA to 24x FY18E PE. With the commencement of production at Suzuki Motor Gujarat (SMG), a major portion of FY18 incremental volumes and all future incremental volumes are likely to come from SMG. SMG will supply cars to Maruti on a no-profit, no-loss basis and will follow the same accounting policies as Maruti. Therefore at an operating margin level the situation is identical to Maruti owning the plant. However, Maruti’s EBITDA margin will be distorted as SMG’s depreciation costs will be included in Maruti's payment to SMG, and therefore in Maruti's raw material costs. Given the distortion of Maruti’s EBITDA margin we shift to a PE-based valuation methodology.
Our 24x FY18E target PE is based on a 10% premium to Maruti’s average multiple over the past two years. We believe the strong upcoming catalysts (GST and Pay Commission implementation) will allow Maruti to trade at a premium multiple relative to its history.
We think the re-rating of Maruti from FY14 has been driven by increased expectations of strong car market growth with a recovery in the Indian economy. While the anticipated recovery has not yet come to pass, Maruti has achieved strong earnings growth over the past two years, driven by its improving market share and expanding margins. We think current valuations are sustainable as we believe Maruti remains well placed competitively to retain a 45%+ market share.
Past analysis has shown that Maruti has kept pace with premiumization in the Indian car market and was able to increase its market share in all price segments over FY10-15. Going forward, we expect faster growth in the mid-price segment (Rs500,000-1.1m). We expect Maruti to be able to increase its market share in this price segment with new launches like the Ciaz, Vitara Brezza and Baleno. We estimate a valuation of Rs6,000 in this scenario.
Figure 29: Maruti Suzuki one-year forward PE | 
| Source: Bloomberg |
Figure 30: Changes to our earnings estimates | Old | New | Change | | FY17E | FY18E | FY19E | FY17E | FY18E | FY19E | FY17E | FY18E | FY19E | Volume (units) | | | | | | | | | | Domestic | 1,501,154 | 1,651,269 | 1,816,396 | 1,409,779 | 1,691,735 | 1,945,495 | -6% | 2% | 7% | Exports | 136,287 | 156,730 | 180,239 | 123,897 | 142,482 | 163,854 | -9% | -9% | -9% | Total | 1,637,440 | 1,807,999 | 1,996,635 | 1,533,676 | 1,834,216 | 2,109,349 | -6% | 1% | 6% | Financials (Rs m) | | | | | | | | | | Net sales | 698,810 | 805,845 | 912,721 | 664,594 | 824,366 | 970,174 | -5% | 2% | 6% | EBITDA | 102,573 | 117,833 | 129,459 | 97,035 | 116,474 | 134,275 | -5% | -1% | 4% | % margin | 14.7% | 14.6% | 14.2% | 14.6% | 14.1% | 13.8% | -1% | -49 bps | -34 bps | Depreciation | 32,971 | 37,916 | 43,603 | 27,237 | 31,322 | 34,454 | -17% | -17% | -21% | Interest | 1,000 | 1,000 | 1,000 | 937 | 937 | 937 | -6% | -6% | -6% | PBT | 81,602 | 94,417 | 102,855 | 84,861 | 101,815 | 118,244 | 4% | 8% | 15% | Tax | 21,217 | 24,548 | 28,799 | 22,913 | 27,490 | 31,926 | 8% | 12% | 11% | Effective tax rate | 26% | 26% | 28% | 27% | 27% | 27% | 4% | 100 bps | -100 bps | PAT | 60,566 | 70,048 | 74,236 | 62,638 | 75,014 | 87,007 | 3% | 7% | 17% |
Source: UBS estimates Figure 31: Maruti earnings sensitivity to Yen, volume growth and EBITDA margin Earnings impact | FY17E | FY18E | +5% appreciation in Yen | -4.6% | -4.8% | +5% depreciation in Yen | 4.6% | 4.8% | | | | +5% domestic vol. growth | 5.6% | 5.1% | -5% domestic vol. growth | -5.6% | -5.1% | | | | +100 bps EBITDA margin | 7.7% | 8.0% | -100 bps EBITDA margin | -7.7% | -8.0% |
|
Source: UBS estimates Figure 32: Maruti (consolidated) UBS versus consensus | FY17E | FY18E | FY19E | (Rs m) | UBS | Consensus | Diff. | UBS | Consensus | Diff. | UBS | Consensus | Diff. | Net sales | 664,594 | 694,618 | -4% | 824,366 | 770,075 | 7% | 970,174 | 900,185 | 8% | EBITDA | 97,035 | 96,240 | 1% | 116,474 | 111,007 | 5% | 134,275 | 129,446 | 4% | EBITDA margin | 14.6% | 13.9% | 75bps | 14.1% | 14.4% | -29bps | 13.8% | 14.4% | -54bps | Net profit | 62,638 | 60,703 | 3% | 75,014 | 70,057 | 7% | 87,007 | 79,735 | 9% |
|
Source: Bloomberg, UBS estimates Downside (Rs3,855): In our downside scenario, we assume limited pick-up in domestic car demand in FY18 as the industry cuts prices only 2-3% amid a higher- than-expected GST rate, limited benefits from the 7th Pay Commission and a sluggish economic recovery. We therefore assume domestic volume growth of 15% for Maruti in FY18E (20% in our base case). We also expect EBITDA margin to decline 100bps in FY18E on higher cost pressures due to ramp-up of the Gujarat plant and only marginal benefits from GST implementation. ASP growth would also be lower as discount levels would increase due to higher competitive pressures. We would expect the shares to trade at 18x FY18E PE in this scenario, implying a fair value of Rs3,855. We would like to thank Suraj Chheda, our support service professional, for his assistance in preparing this research report.
| | | COMPANY DESCRIPTION | return ↑ | Market Cap | US$22.8bn | Shares Outstanding | 302m (COM) | Industry | Automobiles | Region | India | Website | www.marutisuzuki.com |
Maruti Suzuki India (Maruti) is the largest passenger car company in India in terms of sales volume. It has a strong presence in the small car segment with well-recognised models such as Alto, Swift and Wagon R. Maruti has manufacturing facilities in Gurgaon and Manesar. Maruti Udyog was formed as a JV between the government of India and Suzuki in 1983 and renamed Maruti Suzuki in 2007. Suzuki owned a 56.21% stake in Maruti as of December 2014. Industry outlook We expect slightly weaker PV growth (7% YoY) in FY17E due to consumers’ potentially delaying purchase decisions ahead of GST implementation in FY18. However, we expect growth of 18% YoY in FY18E, driven by a boost from implementation of 7th Pay Commission and potential transfer of demand from FY17 to FY18 due to GST. We are structurally positive on India's long-term PV industry growth potential given the low penetration levels, strong medium-term GDP growth outlook and favourable demographics. We estimate the market will grow at a 14% volume CAGR over FY16-23. | Revenue by segment (%), FY16 
Source: Company data |
| | | | Maruti Suzuki India (MRTI.BO) | | | | | | | | | | | Revenues | 445,418 | 508,014 | 586,120 | 664,594 | 13.4 | 824,366 | 24.0 | 970,174 | 1,100,355 | 1,248,186 | Gross profit | 89,777 | 109,670 | 142,284 | 161,045 | 13.2 | 192,323 | 19.4 | 222,167 | 248,782 | 278,021 | EBITDA (UBS) | 52,950 | 68,441 | 91,188 | 97,035 | 6.4 | 116,474 | 20.0 | 134,275 | 148,677 | 166,434 | Depreciation & amortisation | (21,160) | (25,153) | (28,670) | (27,236) | -5.0 | (31,322) | 15.0 | (34,454) | (37,900) | (41,690) | EBIT (UBS) | 31,790 | 43,288 | 62,518 | 69,798 | 11.6 | 85,152 | 22.0 | 99,821 | 110,777 | 124,744 | Associates & investment income | 7,393 | 8,650 | 12,655 | 16,000 | 26.4 | 17,600 | 10.0 | 19,360 | 21,296 | 23,426 | Other non-operating income | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net interest | (1,845) | (2,178) | (937) | (937) | 0.0 | (937) | 0.0 | (937) | (937) | (937) | Exceptionals (incl goodwill) | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Profit before tax | 37,338 | 49,760 | 74,236 | 84,861 | 14.3 | 101,815 | 20.0 | 118,244 | 131,136 | 147,233 | Tax | (9,022) | (11,854) | (19,987) | (22,913) | -14.6 | (27,490) | -20.0 | (31,926) | (35,407) | (39,753) | Profit after tax | 28,316 | 37,906 | 54,249 | 61,949 | 14.2 | 74,325 | 20.0 | 86,318 | 95,730 | 107,480 | Preference dividends | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Minorities | 213 | 168 | 689 | 689 | 0.0 | 689 | 0.0 | 689 | 689 | 689 | Extraordinary items | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net earnings (local GAAP) | 28,529 | 38,074 | 54,938 | 62,638 | 14.0 | 75,014 | 19.8 | 87,007 | 96,419 | 108,169 | Net earnings (UBS) | 28,529 | 38,074 | 54,938 | 62,638 | 14.0 | 75,014 | 19.8 | 87,007 | 96,419 | 108,169 | Tax rate (%) | 24.2 | 23.8 | 26.9 | 27.0 | 0.3 | 27.0 | 0.0 | 27.0 | 27.0 | 27.0 |
| | | | | | | | | | | EPS (UBS, diluted) | 94.44 | 126.04 | 181.87 | 207.36 | 14.0 | 248.32 | 19.8 | 288.03 | 319.18 | 358.08 | EPS (local GAAP, diluted) | 94.44 | 126.04 | 181.87 | 207.36 | 14.0 | 248.32 | 19.8 | 288.03 | 319.18 | 358.08 | EPS (UBS, basic) | 94.44 | 126.04 | 181.87 | 207.36 | 14.0 | 248.32 | 19.8 | 288.03 | 319.18 | 358.08 | Net DPS (Rs) | 12.00 | 25.01 | 35.01 | 51.28 | 46.5 | 61.53 | 20.0 | 71.46 | 79.25 | 88.97 | Cash EPS (UBS, diluted) | 164.49 | 209.31 | 276.77 | 297.52 | 7.5 | 352.01 | 18.3 | 402.08 | 444.64 | 496.09 | Book value per share | 718.43 | 807.52 | 922.81 | 1,038.67 | 12.6 | 1,214.59 | 16.9 | 1,418.90 | 1,645.48 | 1,899.88 | Average shares (diluted) | 302.08 | 302.08 | 302.08 | 302.08 | 0.0 | 302.08 | 0.0 | 302.08 | 302.08 | 302.08 |
| | | | | | | | | | | Cash and equivalents | 6,486 | 432 | 768 | 6,241 | NM | 51,464 | NM | 107,358 | 171,687 | 249,736 | Other current assets | 65,728 | 67,122 | 78,082 | 90,283 | 15.6 | 106,088 | 17.5 | 120,724 | 134,047 | 149,030 | Total current assets | 72,214 | 67,554 | 78,850 | 96,524 | 22.4 | 157,552 | 63.2 | 228,082 | 305,733 | 398,766 | Net tangible fixed assets | 136,732 | 143,796 | 139,893 | 162,657 | 16.3 | 181,335 | 11.5 | 196,880 | 208,981 | 217,291 | Net intangible fixed assets | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Investments / other assets | 105,271 | 132,977 | 183,865 | 183,865 | 0.0 | 183,865 | 0.0 | 183,865 | 183,865 | 183,865 | Total assets | 314,217 | 344,327 | 402,608 | 443,046 | 10.0 | 522,751 | 18.0 | 608,827 | 698,579 | 799,922 | Trade payables & other ST liabilities | 71,190 | 88,886 | 115,180 | 121,045 | 5.1 | 148,118 | 22.4 | 173,068 | 195,029 | 220,260 | Short term debt | 20,041 | 6,662 | 3,913 | 3,913 | 0.00 | 3,913 | 0.00 | 3,913 | 3,913 | 3,913 | Total current liabilities | 91,231 | 95,548 | 119,093 | 124,958 | 4.9 | 152,031 | 21.7 | 176,981 | 198,942 | 224,173 | Long term debt | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other long term liabilities | 5,962 | 4,844 | 4,751 | 4,327 | -8.9 | 3,818 | -11.8 | 3,226 | 2,571 | 1,835 | Preferred shares | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities (incl pref shares) | 97,193 | 100,392 | 123,844 | 129,285 | 4.4 | 155,848 | 20.5 | 180,207 | 201,513 | 226,007 | Common s/h equity | 217,024 | 243,935 | 278,764 | 313,760 | 12.6 | 366,903 | 16.9 | 428,620 | 497,067 | 573,915 | Minority interests | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities & equity | 314,217 | 344,327 | 402,608 | 443,046 | 10.0 | 522,751 | 18.0 | 608,827 | 698,579 | 799,922 |
| | | | | | | | | | | Net income (before pref divs) | 28,529 | 38,074 | 54,938 | 62,638 | 14.0 | 75,014 | 19.8 | 87,007 | 96,419 | 108,169 | Depreciation & amortisation | 21,160 | 25,153 | 28,670 | 27,237 | -5.0 | 31,322 | 15.0 | 34,454 | 37,900 | 41,690 | Net change in working capital | 5,627 | 16,302 | 15,334 | (6,336) | - | 11,268 | - | 10,314 | 8,638 | 10,248 | Other operating | (7,339) | (1,773) | (1,841) | (1,113) | 39.5 | (1,198) | -7.6 | (1,280) | (1,345) | (1,425) | Operating cash flow | 47,977 | 77,756 | 97,101 | 82,425 | -15.1 | 116,406 | 41.2 | 130,495 | 141,611 | 158,681 | Tangible capital expenditure | (36,243) | (30,474) | (20,864) | (50,000) | -139.6 | (50,000) | 0.0 | (50,000) | (50,000) | (50,000) | Intangible capital expenditure | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net (acquisitions) / disposals | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other investing | (31,057) | (27,706) | (50,888) | 0 | - | 0 | - | 0 | 0 | 0 | Investing cash flow | (67,300) | (58,180) | (71,752) | (50,000) | 30.3 | (50,000) | 0.0 | (50,000) | (50,000) | (50,000) | Equity dividends paid | (4,241) | (9,090) | (12,725) | (17,655) | -38.7 | (21,183) | -20.0 | (24,601) | (27,283) | (30,632) | Share issues / (buybacks) | 627 | (584) | (7,211) | (9,297) | -28.9 | 0 | - | 0 | 0 | 0 | Other financing | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Change in debt & pref shares | 4,353 | (13,379) | (2,749) | 0 | - | 0 | - | 0 | 0 | 0 | Financing cash flow | 739 | (23,053) | (22,685) | (26,952) | -18.8 | (21,183) | 21.4 | (24,601) | (27,283) | (30,632) | Cash flow inc/(dec) in cash | (18,584) | (3,477) | 2,664 | 5,473 | 105.4 | 45,223 | NM | 55,895 | 64,328 | 78,049 | FX / non cash items | 16,922 | (2,577) | (2,328) | 0 | - | 0 | 0.0 | 0 | 0 | 0 | Balance sheet inc/(dec) in cash | (1,662) | (6,054) | 336 | 5,473 | NM | 45,223 | NM | 55,895 | 64,328 | 78,049 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.Cash EPS (UBS, diluted) is calculated using UBS net income adding back depreciation and amortization.
Maruti Suzuki India (MRTI.BO) | | | | | | | | | P/E (local GAAP, diluted) | 16.7 | 23.3 | 22.5 | 24.4 | 20.4 | 17.6 | 15.9 | 14.2 | P/E (UBS, diluted) | 16.7 | 23.3 | 22.5 | 24.4 | 20.4 | 17.6 | 15.9 | 14.2 | P/CEPS | 9.6 | 14.0 | 14.8 | 17.0 | 14.4 | 12.6 | 11.4 | 10.2 | Equity FCF (UBS) yield % | 2.5 | 5.3 | 6.2 | 2.1 | 4.3 | 5.3 | 6.0 | 7.1 | Net dividend yield (%) | 0.8 | 0.9 | 0.9 | 1.0 | 1.2 | 1.4 | 1.6 | 1.8 | P/BV x | 2.2 | 3.6 | 4.4 | 4.9 | 4.2 | 3.6 | 3.1 | 2.7 | EV/revenues (core) | 0.9 | 1.5 | 1.8 | 2.0 | 1.6 | 1.3 | 1.1 | 1.0 | EV/EBITDA (core) | 7.2 | 11.2 | 11.6 | 13.9 | 11.6 | 9.5 | 8.2 | 7.3 | EV/EBIT (core) | 12.0 | 17.6 | 16.9 | 19.3 | 15.8 | 12.7 | 10.9 | 9.7 | EV/OpFCF (core) | 12.0 | 17.6 | 16.9 | 19.3 | 15.8 | 12.7 | 10.9 | 9.7 | EV/op. invested capital | 3.2 | 6.3 | 9.8 | NM | NM | 9.2 | 8.5 | 8.4 |
| | | | | | | | | Market cap. | 476,206 | 886,466 | 1,238,666 | 1,531,214 | 1,531,214 | 1,531,214 | 1,531,214 | 1,531,214 | Net debt (cash) | 10,548 | 9,893 | 4,688 | 409 | 409 | (75,498) | (135,610) | (135,610) | Buy out of minorities | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Pension provisions/other | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Total enterprise value | 486,753 | 896,359 | 1,243,353 | 1,531,622 | 1,531,622 | 1,455,715 | 1,395,604 | 1,395,604 | Non core assets | (105,271) | (132,977) | (183,865) | (183,865) | (183,865) | (183,865) | (183,865) | (183,865) | Core enterprise value | 381,482 | 763,382 | 1,059,488 | 1,347,757 | 1,347,757 | 1,271,850 | 1,211,739 | 1,211,739 |
| | | | | | | | | Revenue | 0.5 | 14.1 | 15.4 | 13.4 | 24.0 | 17.7 | 13.4 | 13.4 | EBITDA (UBS) | 22.4 | 29.3 | 33.2 | 6.4 | 20.0 | 15.3 | 10.7 | 11.9 | EBIT (UBS) | 30.4 | 36.2 | 44.4 | 11.6 | 22.0 | 17.2 | 11.0 | 12.6 | EPS (UBS, diluted) | 15.5 | 33.5 | 44.3 | 14.0 | 19.8 | 16.0 | 10.8 | 12.2 | Net DPS | 50.0 | 108.3 | 40.0 | 46.5 | 20.0 | 16.1 | 10.9 | 12.3 |
| | | | | | | | | Gross profit margin | 20.2 | 21.6 | 24.3 | 24.2 | 23.3 | 22.9 | 22.6 | 22.3 | EBITDA margin | 11.9 | 13.5 | 15.6 | 14.6 | 14.1 | 13.8 | 13.5 | 13.3 | EBIT margin | 7.1 | 8.5 | 10.7 | 10.5 | 10.3 | 10.3 | 10.1 | 10.0 | Net earnings (UBS) margin | 6.4 | 7.5 | 9.4 | 9.4 | 9.1 | 9.0 | 8.8 | 8.7 | ROIC (EBIT) | 26.4 | 35.7 | 58.1 | 61.9 | 64.7 | 72.1 | 77.3 | 86.1 | ROIC post tax | 20.0 | 27.2 | 42.5 | 45.2 | 47.3 | 52.7 | 56.4 | 62.9 | ROE (UBS) | 14.3 | 16.5 | 21.0 | 21.1 | 22.0 | 21.9 | 20.8 | 20.2 |
| | | | | | | | | Net debt / EBITDA | 0.3 | 0.1 | 0.0 | (.0) | (0.4) | (0.8) | (1.1) | (1.5) | Net debt / total equity % | 6.2 | 2.6 | 1.1 | (0.7) | (13.0) | (24.1) | (33.8) | (42.8) | Net debt / (net debt + total equity) % | 5.9 | 2.5 | 1.1 | (0.7) | (14.9) | (31.8) | (50.9) | (74.9) | Net debt/EV % | 3.6 | 0.8 | 0.3 | (0.2) | (3.5) | (8.1) | (13.8) | (20.3) | Capex / depreciation % | 171.3 | 121.2 | 72.8 | 183.6 | 159.6 | 145.1 | 131.9 | 119.9 | Capex / revenue % | 8.1 | 6.0 | 3.6 | 7.5 | 6.1 | 5.2 | 4.5 | 4.0 | EBIT / net interest | 17.2 | 19.9 | 66.7 | 74.5 | NM | NM | NM | NM | Dividend cover (UBS) | 7.9 | 5.0 | 5.2 | 4.0 | 4.0 | 4.0 | 4.0 | 4.0 | Div. payout ratio (UBS) % | 12.7 | 19.8 | 19.3 | 24.7 | 24.8 | 24.8 | 24.8 | 24.8 |
| | | | | | | | | Others | 445,418 | 508,014 | 586,120 | 664,594 | 824,366 | 970,174 | 1,100,355 | 1,248,186 | Total | 445,418 | 508,014 | 586,120 | 664,594 | 824,366 | 970,174 | 1,100,355 | 1,248,186 |
| | | | | | | | | Others | 31,790 | 43,288 | 62,518 | 69,798 | 85,152 | 99,821 | 110,777 | 124,744 | Total | 31,790 | 43,288 | 62,518 | 69,798 | 85,152 | 99,821 | 110,777 | 124,744 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts. | | | | | Forecast returns | Forecast price appreciation+18.4% | Forecast dividend yield1.0% | Forecast stock return+19.4% | Market return assumption12.4% | Forecast excess return+7.0% |
| Valuation Method and Risk Statement We use 24x FY18E PE as our valuation methodology for Maruti Suzuki. Higher raw material costs and slowdown in demand remain the key risks to our estimates for Maruti. Increasing competitive pressure due to entry of newer players in its core segment could further impact margins negatively. A significant portion of input imports are from Japan, hence yen appreciation would negatively impact company's margins. Required Disclosures This report has been prepared by UBS Securities India Private Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 31 August 2016 05:01 AM GMT. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions 12-Month Rating | Definition | Coverage | IB Services | Buy | FSR is > 6% above the MRA. | 47% | 32% | Neutral | FSR is between -6% and 6% of the MRA. | 38% | 25% | Sell | FSR is > 6% below the MRA. | 15% | 21% | Short-Term Rating | Definition | Coverage | IB Services | Buy | Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% | Sell | Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% |
Source: UBS. Rating allocations are as of 30 June 2016.
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities India Private Ltd: Sonal Gupta. UBS Securities Japan Co., Ltd.: Kohei Takahashi. Company Disclosures Company Name | Reuters | 12-month rating | Short-term rating | Price | Price date | Maruti Suzuki India | MRTI.BO | Suspended | N/A | Rs5,068.90 | 30 Aug 2016 |
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. Maruti Suzuki India (Rs) 
Source: UBS; as of 30 Aug 2016 |
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