The Hindu Business Line : Maruti Suzuki: Buy

The change in Maruti’s product portfolio over the last year in favour of cars such as the Swift and SX4 has contributed to improved realisations over the past few quarters.

Mr Shinzo Nakanishi, MD… Additions to the product line and capacity expansion to help sustain momentum.

Parvatha Vardhini C

Investors with a two-three year perspective can consider buying the Maruti Suzuki stock. The company’s strong sales numbers in the backdrop of higher interest rates, its market leadership position in the compact car segment and improved product mix in the A2 (compact) and A3 (mid-size) segments are key positives that lend visibility to its earnings prospects.

At the current market price of Rs 904, the stock trades at an attractive valuation of about 15 times the trailing 12-month earnings, making it one of the cheapest stocks in the index basket. Considering the fall in market price in the recent corrections, we reiterate a buy on this stock.

Improved Realisations

The change in Maruti’s product portfolio over the last year in favour of cars such as the Swift, which is at the premium end of the compact segment, and SX4, the company’s midsized car, has consistently contributed to improved realisations over the past few quarters. For the first nine months of FY-08, realisations have improved by 8.5 per cent on a year-on-year basis.

Volume-driven growth

For the latest quarter, net sales rose 27 per cent to Rs 4,674 crore and net profits stood at Rs 467 crore, up 24 per cent Y-o-Y. Revenues were driven by volume growth of 17 per cent and realisation growth of 10 per cent.

Although volumes may face a moderation in 2008 due to high base effect and capacity constraints for the Swift and SX4, a scenario of reduced interest rates (the RBI has asked banks to review lending rates, given their high net interest margins and comfortable liquidity position), additions to the product line and ongoing capacity expansion will help sustain momentum.

Concerns about competition from the Tata Nano have impacted the stock performance. But these may be overdone as the only model that might be affected is the M800. The M800 contributes to less than 10 per cent of the revenues. Also, Maruti has embarked on its long-term plan of shedding its ‘small car maker’ image to fight competition and retain its market share.

The recent move into the midsize segment, the forthcoming sedan version of the Swift, the introduction of ‘Splash’ at the upper end of the compact segment, the re-launch of the Grand Vitara, a multi-utility vehicle ( MUV), and the expected launch of Kizashi in the A5 (premium sedan) segment in 2010 are all pointers to this. Besides, the company is boosting exports by adding markets such as Indonesia, Chile and Egypt for its existing models like M800, Alto and Zen and by launching the ‘A Star’ to cater exclusively to Europe. The company expects to double units of the A Star from the initial 1 lakh by 2010. All this bodes well for volume growth in the next two-three years.

Margins to STAY subdued

Operating margins stood at 13.15 per cent for the current quarter. Although it has remained flat sequentially, it has declined from 14.62 per cent in the June quarter. Escalation in raw material costs, increase in other direct costs such as power and fuel due to ongoing capacity expansion, discount offers, higher promotion expenses and royalty payment for new launches, are expected to keep margins subdued in the medium term.

The company is also sprucing up its retail initiatives. It has rolled out a Rs 7,000-crore plan to set up mega display-only showrooms across India and build warehouses for spare parts and vehicles to reduce lead time in delivering these to customers.

With a high volume strategy to defend its market share being foremost priority, Maruti will have to work with thin margins for the near term, with better product mix being the only factor that will help cushion this to an extent.

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