The Maruti Suzuki stock is a good bet on the reviving fortunes of the domestic auto industry. With the slowdown behind it, the company is well-poised to record double-digit volume growth in the next two to three years.

Maruti’s regained market share, strong product pipeline and improving localisation promise better realisations and profit margins.

Investors willing to hold the stock for at least two years can buy shares of Maruti Suzuki. At ₹2,668, the stock trades at 17 times its estimated earnings for 2015-16. This is lower than its 5-year historical average of about 20 times.

Better times

A slowdown in sales across all segments had muted the prospects of vehicle manufacturers in the last two years. But the domestic auto industry is inching towards better times. From 6 per cent shrinkage in volumes in 2013-14 (over 2012-13), passenger vehicles recorded volume growth of 2.5 per cent in April-July 2014.

Maruti Suzuki’s numbers have been better than the industry, with the company recording 12.5 per cent growth for this period.

Maruti has also been able to take on competition and improve its share. After dipping below 40 per cent in 2011-12 and 2012-13, its market share in passenger vehicle sales moved up to 42 per cent in the just concluded fiscal year and to 44 per cent in April-July 2014.

The company is expected to sustain strong volume growth in the coming months. For one, it is the biggest player in the small-car segment, which constitutes about three-fourth of the cars sold in the country. The Celerio, its recent launch in this segment, has also been well received.

Secondly, the company plans to come out with a light commercial vehicle soon, in what is again a volume play.

At the same time, other forthcoming launches such as the Ciaz sedan and a compact UV hold promise for better realisations.

Their higher price points could help counter the reduced attractiveness of diesel vehicles, which enjoyed better margins.

For the quarter ended June 2014, net sales grew 11 per cent to ₹11,073 crore, aided by volume growth of 12.5 per cent and higher export realisations. Top-line growth could have been higher but for average discounts of ₹21,000 per vehicle. Net profit grew 21 per cent to ₹762 crore, thanks to stable input prices, improved localisation and higher other income. Operating margins stood at 11.7 per cent, slightly higher than the 11.4 per cent recorded in June 2013.

Since it is still early days in the revival, big discounts may be needed in the near-term to attract customers. But with demand improving, the discounts will narrow down.

Localisation is expected to go up further, helping protect against currency fluctuations to a greater extent. From 20-25 per cent of sales two-three years ago, import content has already been reduced to 16 per cent of sales currently.

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