Analysts' corner

Maruti Suzuki, DLF, Ashok Leyland & Voltas

MARUTI SUZUKI
Reco price/date: Rs 1,146 / June 13
Current/target price: Rs 1,107 / Rs 1,458
The Board of Maruti Suzuki India Ltd (MSIL) has approved the merger of Suzuki Powertrain India Ltd (SPIL), a diesel engine and transmission manufacturing special purpose vehicle (SPV). MSIL owns 30 per cent of SPIL while its parent, Suzuki, owns 70 per cent. Post-merger, Suzuki’s stake in MSIL would increase from 54.2 per cent to 56.2 per cent. Analysts believe the merger valuation is fair and estimate cash flow from operations at Rs 520 crore. Given the limited capex, the merger valuation is less than five times FY12 free cash flow and 4.6 times 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 margins. Maintain Buy.

MOSL

DLF
Reco price/date: Rs 193/June 12
Current/target price: Rs 196/Rs 264
Media reports indicate that DLF has consummated a land transaction for Rs 567 crore across 17 acres in four cities (Kolkata, Chennai, Mysore and Thiruvananthapuram). Analysts view the deal as a directional positive as it would mark another step towards its asset monetisation program. The company has renewed its focus on asset monetisation and execution, which is a significant positive. Taking the reported deal at face value, valuation works out to Rs 33 crore/acre, which is extremely high considering that all the land parcels are in Tier-II and III cities. Hence, analysts do not rule out the presence of significant cash sitting in the subsidiary, and await clarity on DLF Hotels & Hospitality’s balance sheet. Maintain Buy.

Edelweiss Securities

ASHOK LEYLAND
Reco price/date: Rs 27/June 13
Ashok Leyland plans to raise Rs 750 crore by way of qualified institutional placement or private placements to meet the proposed capital expenditure and working capital requirements of the company. Ashok Leyland intends to incur a capex of Rs 600-650 crore in FY13 primarily to ramp up production at its Pantnagar plant and at the Nissan LCV joint venture. The company intends to reach its full capacity utilisation at the Pantnagar plant in the current fiscal, which is expected to increase the working capital requirements of the company. Higher production from the Pantnagar facility is expected to result in better profitability for the company as the Pantnagar facility enjoys excise and tax benefits. Maintain buy.

Angel Broking

VOLTAS
Reco price/date: Rs 107/June 13
Current/target price: Rs 104/Rs 83
Voltas’s earnings growth is disappointing, especially given it is flat over FY12-15. Analysts expect its working capital cycle to increase further, led by an increase in infra projects and a lack of product differentiation, forcing Voltas to offer better credit terms. This should impact its free cash flow growth. Voltas’s margins and asset turns are very sensitive to business cycles, which should further depress return on equity to 17-18 per cent. Analysts value Voltas at Rs 83/share based on nine times FY14 estimated earnings, in line with its mid-cycle valuations. Key risks: a sharp recovery in Middle East/India capex and write-backs from the Sidra project. Initiate coverage with Underperform.

Credit Suisse Equity Research