“The Board of Maruti Suzuki (MSIL) has approved the merger of Suzuki Power train (SPIL), a diesel engine and transmission manufacturing SPV. MSIL owns 30% of SPIL and its parent, Suzuki owns 70%. Post merger, Suzuki’s stake in MSIL would increase from 54.2% to 56.2%. Also, MSIL would be Suzuki’s only operating four-wheeler subsidiary in India. We believe that the merger valuation is fair and that it does not compromise the interests of minority shareholders. We estimate cash flow from operations at ~INR5.2b, and given the limited capex, the merger valuation is less than 5x FY12 FCF and ~4.6x FY12 EV/EBITDA.”
“The merger would result in integrated operations for diesel vehicles within a single entity, and the diesel vehicle profitability would fully reflect in MSIL (S/A EBITDA margin of 7.8% v/s merged entity EBITDA margin of 9.4% in FY13E). The management indicated that there is scope to improve operating performance, with levers in the form of (a) reducing import content from the current 30%, (b) common sourcing and economies of scale upon commencement of MSIL’s diesel engine facility in mid-FY14, and (c) working capital reduction. The stock trades at 15.3x FY13E consolidated EPS of INR75.1 and 8.6x FY13E cash EPS of INR132.6. Maintain Buy, with a price target of INR1,458 (~11x FY13E cash EPS),” says Motilal Oswal research report.
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