Pak Suzuki: Upgrade to ‘Buy’ on launch of Wagon R

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2005 FORD MUSTANG-We raise our investment rating for Pak Suzuki Motor Company (PSMC) by one notch to ‘Buy’ from ‘Hold’ where we see the expected launch of Wagon R on April 18, 2014 as a potential game-changer for the company.

We raise our earnings estimates for PSMC by 16%/20% over 2014E/15F with expected Wagon R sales of 10k/12k in 2014E/15F. In tandem, we lift our Target Price by 41% to Rs240 (19% potential total return).

-While granular details of the launch (i.e. pricing etc) remain thin, our channel checks suggest PSMC’s latest addition will fill the void in the small-car segment after the discontinuation of Alto.

We expect operational efficiencies from production of Wagon R to boost PSMC’s GMs while recent PKR gains vis-à-vis USD and JPY should also substantially cut PSMC’s costs. Moreover granting of MFN status to India could potentially open doors for the re-launch of Alto.

-Though the stock has notched up an impressive 32% return YTD 2014 driven largely by Pak Rupee (PKR) gains, we believe the market is yet to fully price in the launch of Wagon R. PSMC trades at 6.6x 2014E PE (27% discount to KSE).

9Upgrade to ‘Buy’ on launch of Wagon R

We raise our investment rating for Pak Suzuki Motor Company (PSMC) by one notch to ‘Buy’ from ‘Hold’ earlier on the back of expected launch of Wagon R on April 18, 2014 with a 41% higher Target Price of Rs240. Though the stock has notched up an impressive 32% return YTD 2014, driven largely by Pak Rupee (PKR) gains, we believe the market is yet to fully price in the launch of Wagon R. Building in both upside from Wagon R sales and margin improvement post PKR appreciation, we raise our earnings estimates for PSMC by 16%/20% over 2014E/15F. We incorporate Wagon R sales of 10k/12k units in 2014E/15F, taking our cue from average 13k annual unit sales of Alto prior to its discontinuation. We estimate that annual sale of every 10k units of Wagon R would likely deliver a positve earnings impact of ~Rs4/share (18% of 2013 EPS) for PSMC.

Details remain nascent; Wagon R to fill Alto void

While granular details of the launch (i.e. pricing etc) remain thin, our channel checks suggest that PSMC’s latest addition will fill the void in the small-car segment after the discontinuation of Alto. With an expected engine size of 1,000CC, we expect Wagon R to be priced between the Rs800k-1,000k. Moreover granting of Most Favored Nation (MFN) status to India could potentially open doors for the re-launch of Alto as well. 

Cost efficiencies to boost GMs

We expect significant improvement in PSMC margins going forward on the back of recent PKR gains vis-à-vis USD and JPY. We believe apart from PKR gains, PSMC’s operational efficiencies from additional production of Wagon R are also likely to improve, driving up PSMC gross margins further.

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