We remain overweight on Maruti Suzuki and raise our FY14e EPS by 17%, largely driven by Japan depreciation. We consequently increase our DCF-based target price to R1,820 (R1,600 earlier). This is an implied P/E of 15x on FY14e EPS and 14x FY15e EPS.
We believe the stock is likely to see a gruelling slow improvement in the demand environment, but a windfall from the Japanese yen depreciation. We remain positive on the long-term potential of the Indian car industry and Maruti's ability to maintain its market share.
Maruti has the highest exposure to first-time buyers in India and is well positioned to benefit from any revival in the car market in 2013-14, in our view.
Our valuation is based on a DCF analysis and cross-checked by both P/E and EV/ebitda multiples. We use a weighted average cost of capital (WACC) of 11%, based on a risk-free rate of 3.5% and cost of equity of 11% (all unchanged).
Maruti reported an in-line Q3FY13 with revenues of R10,960 crore, up 45.6% y-o-y, compared to our expectation of R11,080 crore.
Ebitda margin was 8.1% (increased 180 bps q-o-q), in line with our expectation and higher than the consensus expectation of 7.9%. The average selling price per vehicle was up by 3.8% q-o-q, owing to an improved product mix (higher compact and super compact sales). The increase in the tax rate to 25.8% from the 20% guidance earlier surprised us.
Volumes grew strongly in the quarter (up 26% y-o-y and 31% q-o-q), led by the introduction of the new Alto (25% of the total sales in Q3FY13) and full production at the Manesar plant.
Average realisation benefited from the 40% contribution from diesel variants in Q3. We expect modest 6% y-o-y volume growth in Q4 and 19% y-o-y volume growth in FY14.
We remain positive on the margin outlook for the company. We believe consensus underestimates the operating leverage potential for Maruti and the 180 bps q-o-q margin expansion in Q3 reinforces our thesis. The company imports nearly 22% of its costs in yen and the recent nearly 15% depreciation in yen will start to accrue to margins from Q1FY14 (Q4FY13 is largely hedged).