India Equity Research | Automobiles Company Update

MARUTI SUZUKI INR 679

Short-term pain but long-term gain ACCUMULATE October 16, 2008

We recently met the management of Maruti Suzuki (MSIL). Following are the Ashutosh Goel
highlights: +91-22-6623 3313
ashutosh.goel@edelcap.com
Current scenario

„ Retail sales have been robust so far in October given multiple festivals falling Amol Bhutada
together. +91-22-6620 3032
„ The near term is challenging given the negative sentiment, liquidity crunch, and amol.bhutada@edelcap.com
lack of finance availability. The lower compact segment has been particularly
affected due to the slow down in financing activities. Siddharth Bhatt
+91-22-4040 7451
„ Higher interest rates are not so much of an issue as manufacturers and dealers
siddharth.bhatt@edelcap.com
are making up through promotions. There is no evidence of customers down-
trading to lower-end models to save money.
„ MSIL will have a production capacity of 1 mn units by the end of this month with
the expansion of the vehicle and engine plant at Manesar. Reuters : MRTI.BO

Bloomberg : MSIL IN

Near-term outlook

„ Implementation of Sixth Pay Commission recommendations will boost car sales Market Data

and MSIL is ready with its outreach strategy to tap this demand. Its TrueValue 52-week range (INR) : 1,252 / 475
used car chain will help it tap the market through exchange and upgrade offers.
Share in issue (mn) : 288.9
„ Export margins are currently much lower than domestic margins as exported
M cap (INR bn/USD mn) :196.2 / 4,044.4
vehicles are priced on marginal cost basis. However, going forward, with the launch
Avg. Daily Vol. BSE (‘000) : 916.9
of A-star, the company plans to earn a return on investment which is at least equal
to its yield on treasury investment (at 11.5% currently). As a result, future export
margins will be higher than the current, but continue to be lower than domestic Share Holding Pattern (%)

margins, given additional costs involved in freight, import duties, etc. Promoters : 54.2
„ All the negatives seen in Q1FY09 on the operating performance front are still MFs, FIs & Banks : 24.0
present in Q2FY09, hence, margins are expected to be subdued in Q2FY09 as
FIIs : 14.8
well. However, with the softening of crude and commodity prices globally,
Others : 7.0
margins are expected to rise in H2FY09.

Outlook and valuations: Subdued margin outlook; maintain ‘ACCUMULATE’ Relative Performance (%)
The near term outlook for the company remains subdued, given modest domestic
Sensex Stock Stock over
sales and low margins expected for the second quarter in row. The long term outlook, Sensex
however, remains robust with: new model launches; implementation of the Sixth Pay 1 month (20.0) (2.7) 17.3
Commission recommendations; and expected softening of interest rates. We maintain 3 months (14.0) 23.9 38.0
our ‘ACCUMULATE’ recommendation on the stock. 12 months (43.3) (42.8) 0.5

Financials (INR mn)

Year to March FY07 FY08 FY09E FY10E
Revenues (INR mn) 148,288 181,541 225,431 272,979
Rev. growth (%) 21.4 22.4 24.2 21.1
EBITDA (INR mn) 21,653 24,612 25,713 31,770 1,300 1,400
Net profit (INR mn) 15,620 17,309 17,859 21,036
1,100 1,050
Basic shares outstanding (mn) 289 289 289 289
('000)
(INR)

Diluted EPS (INR) 54.0 59.9 61.8 72.8 900 700

EPS growth (%) 31.5 10.8 3.2 17.8
Diluted P/E (x) 12.5 11.3 11.0 9.3 700 350
EV/EBITDA (x) 7.1 6.1 5.7 4.2
ROACE (%) 48.6 44.7 37.6 38.0 500 0
ROAE (%) 25.4 22.7 19.4 19.2 Oct-07 Apr-08 Oct-08

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Maruti Suzuki

Long-term strategy

„ MSIL is targeting to sell 1 mn units in the domestic market and 200K units in the export
market by FY11.

„ The company plans to increase its distribution network from 600 service points currently
to 1,000 by FY11.

„ Its product strategy is to pack the compact segment (A2) with a range of products as it
believes this segment still will be the largest segment.

„ Going forward, the parent company Suzuki will follow the ‘world strategic model’
approach wherein a new model will be launched at the same time across all four target
geographies viz. Japan, Europe, China, and India. The launch of A-star in November
2008 is a part of this strategy.

„ The company currently has a 100K diesel engine production capacity, which will be
increased to 200K in a year’s time to 300K eventually. Diesel engines are currently used
in Swift and Dzire and these models have three-six months waiting period.

„ MSIL plans develop a domestic R&D capability at par with Suzuki, Japan. As first step in
this direction, the company has increased total engineers in its R&D department to 500
from 270 a year back. This number will eventually be increased to 1,000. The company
has so far played second fiddle to Suzuki (Japan) when it comes to product development
and design. Going forward, the focus will be on collaborative research.

Other highlights

„ A-star export will commence from January 2009 and the car will be exported to Eastern
as well as Western Europe. The company targets to export 100K units of A-star in FY10.

„ As part of its brand building strategy, MSIL will open brand centres in major Indian cities.
These centres will engage families in Suzuki products and technologies and will help
attract trendy customers.

„ The company plans to build stock yards at four locations in the country to reduce time
between factory and dealership. It will also help reduce working capital requirement of
dealers.

„ There is no change in the company’s expansion plans due to slow down in overall
activities. MSIL is a net cash positive company and hence, does not borrow anything
from the market for its working capital requirement.

„ According to the company’s management, in spite of the credit tightening, financing has
been steady at 70% of the total vehicles sold in the past six months.

„ The company has no plans of launching an ultra low-cost car and will not reduce prices of
M800 post Tata Motors’ Nano launch. The management maintained that the event may
affect the lower-end models, but the impact is not likely to be significant. On a contrary,
it will offer an opportunity as Nano buyer will eventually want to upgrade to higher
segments.

„ According to the management, launching a product in the ultra low-cost segment (Nano
segment) means lowering profitability levels as margins are significantly low in the
segment. The project’s success will hinge on very high sales volumes and the project has
implications for suppliers and other partners in business.

„ The company will be using next generation K-series engines in the A-Star. These engines
are lighter, more fuel efficient, and comply with Euro IV emission norms.

„ The company currently exports to Latin America, Africa and to some parts of the Middle
East and expects some spike in exports to these geographies going forward.

Edelweiss Securities Limited

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 Maruti Suzuki

Company Description

Maruti Suzuki (MSIL) is India’s largest passenger vehicle manufacturer with a market share
of more than 50%. It is a key player in the compact car segment with a dominant marker
share. Suzuki Motor Corporation (Suzuki) of Japan hold 54% stake in MSIL. MSIL offers the
widest product range in passenger cars (10 models) with special focus on the compact car
segment (five models). The company has an installed production capacity of 870,000 units
per annum and is expected to increase it to 1 mn units by the end of H1FY09.

Investment Theme

MSIL is likely to face intense competition from several global players, most of which plan to
enter the MSIL-dominated compact segment for the first time. In recent times, higher input
costs have had an adverse impact on the company’s operating margins. Going forward, we
expect company’s margins to remain under pressure due to higher costs associated with new
model launches and exposure to yen-denominated component import. On the positive side,
company is also likely to get a major boost in sales from exports and leverage its market
leader position in the growing domestic market.

Key Risks

Increasing input costs and higher product launch costs may hit margins significantly.
Slowdown in growth in the compact segment could hit MSIL, as it is substantially dependent
on this segment. Further, intense competition is likely to ensue over the next few quarters as
more players enter the market with new products.

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Maruti Suzuki

Financial Statements
Income statement (INR mn)
Year to March FY06 FY07 FY08E FY09E FY10E
Total volume (nos) 561,822 674,893 764,848 895,011 1,061,189
Income from operations 122,151 148,288 181,541 225,431 272,979
Materials costs 86,782 103,381 127,921 162,687 197,065
Manufacturing expenses 11,707 15,514 19,405 24,214 28,684
Staff costs 2,287 2,884 3,562 4,808 6,010
S G & A expenses 3,560 4,999 6,215 8,208 9,670
Less:Expenses capitalised 67 143 174 200 220
Total operating expenses 104,269 126,635 156,929 199,718 241,210
EBITDA 17,882 21,653 24,612 25,713 31,770
Depreciation and amortisation 2,854 2,714 5,682 7,170 8,935
EBIT 15,028 18,939 18,931 18,543 22,835
Interest 204 376 596 674 674
Non-Operational income 2,663 4,235 6,697 7,284 7,891
Profit before tax 17,487 22,798 25,031 25,154 30,052
Provision for tax 5,609 7,179 7,722 7,295 9,016
Current taxes 5,930 6,281 7,722 7,295 9,016
Deferred taxes (320) 897 0 0 0
Core profit 11,878 15,620 17,309 17,859 21,036
Profit after tax 11,878 15,620 17,309 17,859 21,036
Profit after minority interest 11,878 15,620 17,309 17,859 21,036
Consolidated PAT 11,878 15,620 17,309 17,859 21,036
Shares outstanding 289 289 289 289 289
Earnings per share (EPS) 41.1 54.0 59.9 61.8 72.8
Diluted shares outstanding 289 289 289 289 289
Diluted EPS 41.1 54.0 59.9 61.8 72.8
Cash EPS 49.9 66.5 79.6 86.6 103.7
Dividend per share 4.0 5.3 5.8 5.3 6.2
Dividend payout (%) 9.7 9.7 10.0 10.0 10.0

Common size metrics- as % of net revenues

Year to March FY06 FY07 FY08E FY09E FY10E
Operating expenses 85.4 85.4 86.4 88.6 88.4
Materials costs 71.0 69.7 70.5 72.2 72.2
Staff costs 1.9 1.9 2.0 2.1 2.2
S G & A expenses 2.9 3.4 3.4 3.6 3.5
Depreciation 2.3 1.8 3.1 3.2 3.3
Interest expenditure 0.2 0.3 0.3 0.3 0.2
EBITDA margins 14.6 14.6 13.6 11.4 11.6
Net profit margins 9.7 10.5 9.5 7.9 7.7

Growth metrics (%)

Year to March FY06 FY07 FY08E FY09E FY10E
Revenues 10.1 21.4 22.4 24.2 21.1
EBITDA 15.0 21.1 13.7 4.5 23.6
PBT 34.0 30.4 9.8 0.5 19.5
Net profit 39.1 31.5 10.8 3.2 17.8
EPS 39.1 31.5 10.8 3.2 17.8

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 Maruti Suzuki

Balance sheet (INR mn)

As on 31st March FY06 FY07 FY08E FY09E FY10E
Equity capital 1,445 1,445 1,445 1,445 1,445
Reserves & surplus 53,081 67,094 82,713 98,786 117,719
Shareholders funds 54,526 68,539 84,158 100,231 119,164
Secured loans 717 635 635 635 635
Unsecured loans 0 5,673 5,673 5,673 5,673
Borrowings 717 6,308 6,308 6,308 6,308
Deferred tax (Net) 779 1,675 1,675 1,675 1,675
Deferred tax liability 1,990 2,776 2,776 2,776 2,776
Deferred tax Assests 1,211 1,101 1,101 1,101 1,101
Sources of funds 56,022 76,522 92,141 108,214 127,147
Gross block 49,546 61,468 72,857 97,857 114,857
Depreciation 32,594 34,871 40,553 47,723 56,657
Net block 16,952 26,597 32,304 50,134 58,200
Capital work in progress 920 2,389 5,000 0 0
Investments 20,512 34,092 49,888 51,756 63,285
Inventories 8,812 7,132 9,297 10,940 10,940
Sundry debtors 6,461 7,474 9,786 10,940 10,940
Cash and bank balance 14,016 14,228 3,449 4,283 5,187
Loans and advances 7,662 9,241 9,341 9,441 9,541
Other current assets 458 384 434 484 534
Total current assets 37,409 38,459 32,308 36,089 37,142
Sundry creditors 5,551 9,096 9,786 10,940 10,940
Others current liabilities 9,507 11,014 12,014 13,014 14,014
Provisions 4,713 4,905 5,558 5,810 6,526
Total current liab. & provisions 19,771 25,015 27,359 29,764 31,480
Net current assets 17,638 13,444 4,949 6,324 5,662
Uses of funds 56,022 76,522 92,141 108,214 127,147
Book value per share (BV) (INR) 189 237 291 347 412

Free cash flow

Year to March FY06 FY07 FY08E FY09E FY10E
Net profit 11,878 15,620 17,309 17,859 21,036
Depreciation 2,854 2,714 5,682 7,170 8,934
Deferred tax (320) 897 0 0 0
Others 320 (897) 0 0 (0)
Gross cash flow 14,732 18,333 22,991 25,029 29,970
Less: Changes in WC 276 (4,406) 2,284 541 (1,566)
Operating cash flow 14,456 22,739 20,707 24,488 31,536
Less: Capex 1,568 13,828 14,000 20,000 17,000
Free cash flow 12,888 8,912 6,707 4,488 14,536

Cash flow metrics

Year to March FY06 FY07 FY08E FY09E FY10E
Operating cash flow 14,456 22,739 20,707 24,488 31,536
Financing cash flow (3,820) 4,880 (1,690) (1,786) (2,104)
Investing cash flow (6,914) (27,408) (29,796) (21,868) (28,529)
Net cash flow 3,722 212 (10,779) 834 903
Capex 1,568 13,828 14,000 20,000 17,000
Dividend paid 1,153 1,519 1,690 1,786 2,104

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Maruti Suzuki

Profitability & liquidity ratios

Year to March FY06 FY07 FY08E FY09E FY10E
ROAE (%) 24.2 25.4 22.7 19.4 19.2
ROACE (%) 44.0 48.6 44.7 37.6 38.0
Inventory days 29 24 20 20 18
Debtors days 19 17 17 17 15
Payble days 19 22 23 20 18
Cash conversion cycle (days) 28 19 14 16 15
Current ratio 1.9 1.5 1.2 1.2 1.2
Debt/EBITDA 0.0 0.3 0.3 0.2 0.2
Fixed asset turnover (x) 6.8 6.8 6.2 5.5 5.0
Debt/Equity 0.0 0.1 0.1 0.1 0.1
Adjusted debt/equity 0.0 0.1 0.1 0.1 0.1

Operating ratios
Year to March FY06 FY07 FY08E FY09E FY10E
Total asset turnover 2.3 2.2 2.2 2.3 2.3
Fixed asset turnover 6.8 6.8 6.2 5.5 5.0
Equity turnover 2.5 2.4 2.4 2.4 2.5

Du Pont Analysis
Year to March FY06 FY07 FY08E FY09E FY10E
NP margin % 9.7 10.5 9.5 7.9 7.7
Total assets turnover 2.3 2.2 2.2 2.3 2.3
Leverage multiplier 1.1 1.1 1.1 1.1 1.1
ROAE % 24.2 25.4 22.7 19.4 19.2

Valuations parameters
Year to March FY06 FY07 FY08E FY09E FY10E
EPS (INR) 41.1 54.0 59.9 61.8 72.8
Y-o-Y growth (%) 39.1 31.5 10.8 3.2 17.8
Diluted consolidated EPS (INR) 41.1 54.0 59.9 61.8 72.8
CEPS (INR) 49.9 66.5 79.6 86.6 103.7
P/E (x) 16.5 12.5 11.3 11.0 9.3
Diluted consolidated P/E (x) 16.5 12.5 11.3 11.0 9.3
Price/BV (x) 3.6 2.9 2.3 2.0 1.6
EV/Sales (x) 1.3 1.0 0.8 0.6 0.5
EV/EBITDA (x) 9.1 7.1 6.1 5.7 4.2
Dividend yield % 0.6 0.8 0.9 0.8 0.9

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 Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021,
Board: (91-22) 2286 4400, Email: research@edelcap.com

Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Shriram Iyer Head Research shriram.iyer@edelcap.com +91 22 2286 4256

Coverage group(s) of stocks by primary analyst(s): Auto/Auto Components:

Auto: Ashok Leyland, Tata Motors, Bajaj Auto Ltd, Maruti Udyog, Mahindra & Mahindra, Hero Honda Motors, TVS Motor
Auto Components: Amtek Auto, Amtek India, Bharat Forge,Sona Koyo Steering Systems, and Hinduja Foundries.

Maruti Suzuki Recent Research

1,180 Date Company Title Price (INR) Recos

1,050 Accm 14-Oct-08 Auto Monthly Update

Sales Update
920
(INR)

Buy
Accm
790 08-Oct-08 Auto Monthly Update
Buy Fact sheet
660 Accm
Accm 23-Sep-08 Maruti ABC
530
Suzuki
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08

22-Sep-08 Auto Channel Bleak outlook;

Check Report Sector Update

Distribution of Ratings / Market Cap Rating Interpretation

Edelweiss Research Coverage Universe Rating Expected to

Buy Accumulate Reduce Sell Total Buy appreciate more than 20% over a 12-month period

Rating Distribution* 94 59 14 8 187

Accumulate appreciate up to 20% over a 12-month period
* 10 stocks under review / 1 rating withheld
Reduce depreciate up to 10% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn

Market Cap (INR) 75 65 47 Sell depreciate more than 10% over a 12-month period

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