MARUTHI SUZUKI

Buy Maruti Suzuki India Ltd CMP: Rs. 1538, Target Price: Rs. 1725

Maruti Suzuki India Ltd (MARSUZ) is India’s largest passenger vehicle  manufacturer with more than 50% market share. It is a key player in the  compact car segment with a dominant market share. Suzuki Motor Corporation  (Suzuki) of Japan holds 54% stake in the company. MSIL offers the  widest product range in passenger cars (10 models), with special focus on  the compact car segment (five models). Passenger vehicle penetration in India is currently low compared with comparable  countries. In the coming years, penetration is expected to rise driven by growing  disposable incomes, favorable demographics, better availability and penetration  of financing, and increasing availability of product choices. With MARSUZ  being the largest passenger vehicle manufacturer in India is likely to benefit  significantly from the same. MARSUZ is expected to leverage its leadership in thegrowing-domestic   market with the launch of several new models. With parent Suzuki Motors choosing  India to be its base for small car manufacturing, we expect the company  to boost its exports significantly. Going forward, we expect new launches and additional diesel capacity  to drive MARSUZ’s sales. Demand momentum and market share gain  would be driven by: (1) new launches namely Dzire CS and Eritga and (2)  additional capacity for diesel engines which goes up from 20,000 p.m. to  33,000 units p.m. We expect Maruti to return to pre-strike period market share  of 45% in CY13 in the car segment vs 42% market share in FY12. Royalty and direct imports are 13-14% of sales while indirect imports are  at ~10% of sales. Hence, current JPY depreciation will benefit MSIL.  A 1% depreciation of JPY will increase EPS by 3%. JPY has depreciated  by 21% from recent peak. The effective exchange rate for USD/JPY for  MSIL in the quarter stood at 90.0 versus the current levels of 99 and it has  hedged 30% of its yen exposure for FY14 at 95.0. MARSUZ has been a preferred early interest rate cycle play. Its multiple  expands to the range of 16x-21x 1-year forward earnings when growth  returns and earnings upcycle begins. We expect a similar cycle to play  out as earnings visibility improves and RBI cuts interest rates,  thus improving the industry outlook.

Tech Mahindra Ltd

 BUY  CMP: Rs. 962, Target Price: Rs. 1100

Tech Mahindra Ltd (TECMAH) has been one of the leaders in providing end to end solution to the IT needs of the telecom vertical and derives ~96% of its revenue from the telecom vertical. Its top client British Telecom (BT) contributes 29% to revenues. The company was incorporated in 1986 as a joint venture between Mahindra & Mahindra and British Telecommunications (BT). In 2009, Tech Mahindra acquired Satyam Computer Services Limited and plans to merge it into Tech Mahindra in the next few months. TECHM has over 49,059 employees. The company’s revenues for the past twelve months stood at INR 63.8bn (USD1.2bn).

IT Industry revenues are forecasted to grow by 12-13% over FY13-14E and as a scale player TECMAH is expected to gradually increase its share of the total pie largely through its merger with Satyam computers. Its well-established practice, combined with recent acquisition of Hutchison Group and Comviva, provides significant cross-selling opportunity, which could help TECMAH win some of the large size deals.

Tech Mahindra + Mahindra Satyam = A formidable combination: The merger of MSAT with TECMAH creates a formidable player with a client base of 500 (TECMAH’s player, TECMAH s 140 and MSAT’s 368), which is similar to Tier I companies. This opens up a plethora of opportunity for the combined entity to increase the wallet share among a large base of clients. This will enable significant operational synergies leading to improvement in margin.

Diversification, high non-BT growth key: TECMAH on a standalone basis derives ~96% of revenues from telecom. Post the merger, contribution of telecom will come down to 45%. Also, the geographical concentration of Europe in TECMAH reduces from 45% to 35%. Moreover, TECMAH specialized telecom play has resulted in a robust growth for the company in non-BT clients which is encouraging under current environment.

Strong turnaround in the offing: Given the significant margin performance by MSAT in the last few quarters (from 5.9% in Q2FY11 to 21.6% in Q3FY13) combined with a modest growth by TECHM amidst uncertainty in telecom vertical gives us the comfort to forecast a revenue growth of 14%/10% for FY14E/FY15E respectively (for the merged entity).

Disclaimer

The information, analysis and estimates contained herein are based sources believed to be reliable. Weaccept noliability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for the completeness and accuracy. It is not an offer to sell or a solicitation to buy securities. This informationis for circulation only