Maruti Suzuki – Kotak Securities Research Report

Kotak Securities are pessimistic on Maruti Suzuki and have recommended a REDUCE for the following reasons:

Aggressive increase in capacity to take care of future demand. Maruti Suzuki to add another 0.5mn units capacity in the next 2-3 years.

Maruti Suzuki to invest in excess of Rs60bn over the next three years on capacity expansion and building up a R&D centre.

Demand for cars continues to remain robust. Industry car volumes grew by 27% YTD.

Maruti Suzuki volumes remain unaffected by competition. Maruti Suzuki logs its highest ever monthly volumes in August 2010.

Margins to remain under pressure due to firm commodity prices. Higher royalty will remain a drag on the margins.

We expect net profit de-growth for Maruti Suzuki in FY11. Given that we believe that the current valuations to be expensive.

We therefore continue to maintain our REDUCE stance on the stock with an increased price target of Rs1,224.

Maruti Suzuki plans aggressive capacity expansion

Maruti Suzuki has indicated towards addition of 0.5mn units at Manesar to take their effective capacity to more than 1.7mn annually.

Maruti Suzuki would be spending in excess of Rs60bn over the next 3 years towards capacity expansion and building up an engine plant and a R&D unit.

Currently Maruti Suzuki produces more than 100,000 cars monthly thereby taken its capacity slightly in excess of 1.2mn.

Maruti Suzuki expects to add another line capable of producing 250,000 units in Manesar and the same is expected to get ready by 4QFY12.

Maruti Suzuki is planning to add one more line of 250,000 units and the same is expected to get competed by 2HFY13.

On the above mentioned capex plans Maruti Suzuki will be spending in excess of Rs60bn and all the projects will be funded from internal accrual.

Maruti Suzuki‘s cash and cash equivalents position in FY10 stood at ~Rs70bn.

We expect Maruti Suzuki to generate cash in excess of Rs30bn annually over the next 3 years. Accordingly Maruti Suzuki is well funded to finance its future capex plans.