Maruti: comfortable ride ahead

Maruti Suzuki is best placed to benefit from a recovery in passenger vehicle sales on the back of falling fuel prices, new product launches and a strong distribution network. The success of its recent launches, coupled with new products, is expected to ensure a robust double-digit growth in volumes going ahead. The management expects a 10 per cent volume growth in the current financial year. Analysts say given the 13 per cent growth in domestic volumes for FY15 (year-to-date), the company should grow between 11 per cent and 14 per cent in the current financial year.

While a recovery will help all automobile makers, Maruti Suzuki will benefit the most given the higher growth for entry level models in a turnaround. Jinesh Gandhi of Motilal Oswal Securities says, “Fuel price deflation, after 11-14 per cent annual growth for petrol/diesel since FY10, coupled with improving macro environment and consumer sentiment, would help in reviving passenger vehicle demand, especially for entry-level cars.”

Maruti dominates the petrol-run small car segment and with consumers moving back to this segment, given the bridging of the fuel-price gap, it would be able to increase its current 62 per cent market share in the segment. Improvement in sentiment given the higher number of customer enquiries (double digits over the year-ago period) and the return of the first-time urban buyer (largely entry-level purchases) should boost volumes for Maruti's entry-level portfolio.

The company has been improving its marketshare on the back of a slew of recent successful launches such as the Ciaz, Celerio and the refreshed Swift. The firm has improved its market share in small cars and entry-level sedans from 54 per cent a year ago to 58 per cent now. This, say analysts at Jefferies, will stay after the launch of a new and automatic version of the Alto, and no new competition expected in these segments.

What could add to the market share are new the products expected to be launched from 2015 such as the refreshed Dzire (March quarter, 2015), crossover, mini sports utility vehicle and a small commercial vehicle – all in FY16. These new launches, especially those in FY16, are in areas where Maruti does not have a major presence. The success of these vehicles could lead to volume upgrades, say analysts.

A bonus, in addition to the operational performance, is the depreciating yen. Bank of America Merrill Lynch analysts have upgraded the company’s operating margins for FY16 by 60 basis points given the sharp yen depreciation. A one per cent fall in yen (given unhedged yen exposure) improves net profit by two per cent, according to the analysts. Analysts at Jefferies expect a 300-basis point gain over the FY14-17 period on the earnings before interest, taxes, depreciation, and amortization (Ebitda) margin front on the back of operating leverage, lower discounts from current elevated levels, localisation and currency gains.

At the current price of Rs 3,331, the stock is trading at 18.9 times its FY16 estimates and most analysts have a buy with target prices in the Rs 3,700-4,000 range. While there is handsome gain at the upper end of the target range, investors can expect better returns (the stock has given 38 per cent returns in the past six months) if the holding period is longer given upcoming triggers and favourable tailwinds.