Stock Fundamentals

Maruti Suzuki: BUY

Updated on: May 18, 2013
BL18MARUTI

BL18MARUTI

19marutiCOL.eps

19marutiCOL.eps

A strong portfolio of diesel cars, diversification into utility vehicles and stabilisation in raw material costs are positives.

For investors with a one-two year perspective, the Maruti Suzuki stock is an attractive bet. With strikes and plant shutdowns behind it, the company continues to gain from its strong portfolio in the diesel segment.

Improving market share in passenger cars, well-timed entry into utility vehicles (UVs) and stabilisation in raw material costs are added positives. At Rs 1,709, the stock trades at around 16 times its estimated earnings for FY14, below its historical average of 18-19 times. .

Juggernaut rolls on

Maruti Suzuki’s tryst with labour unrest continued in 2012-13 too, with a lock-out in its Manesar plant for about a month in July-August 2012. Since then, however, the company has done well during what has been a tough time for the economy.

A cyclical slowdown in the auto industry, high inflation and interest rates saw domestic car makers ending 2012-13 with a 7 per cent drop in car sales, the sharpest decline in a decade.

Maruti managed to buck the trend with a one per cent volume growth during this period. This improved its market share in passenger cars to 45.4 per cent in 2012-13, from 42 per cent in the previous year.

Maruti’s good run continued in April 2013 too. Even as passenger car sales for the industry as a whole dropped by 10 per cent year-on-year, Maruti sold about 3,500 cars more in April 2013 compared with April 2012. With inflation moderating and interest rates expected to soften, car sales could look up sooner than later.

Driven by diesel

One of the key reasons for Maruti’s outperformance is its strong portfolio in the diesel segment. In 2012-13, even as sales of older models such as the Alto, Wagon R and A-Star faltered, the Swift and the Dzire kept the company flag flying, mainly on the strength of diesel variants.

Dzire alone clocked about 1.7 lakh units — up 54 per cent year-on-year. Diesel vehicles now constitute about 37 per cent of the total vehicles sold for Maruti, compared with 25 per cent a year ago.

With diesel prices being linked to market rates in stages, the wide gap between petrol and diesel prices (which triggered the spurt in demand for diesel vehicles last year) is narrowing. Nevertheless, diesel is expected to continue to remain cheaper than petrol.

From about 48 per cent in 2011-12, the share of diesel vehicles in total passenger vehicle sales moved up to 58 per cent in 2012-13 for the industry. Although car makers foresee the demand for diesel cars to cool off a bit, they envisage the demand to be equally split between diesel and petrol vehicles in future. While diesel vehicles per se bring higher realisations, the company will also benefit on the margin front from backward integration due to amalgamation of Suzuki Powertrain, a manufacturer of diesel engines.

Well-timed UV entry

Maruti’s well-timed entry into the UV segment should also support its growth prospects.

The launch of the Ertiga in April 2012 could not have come at a better time with UVs ending 2012-13 with an impressive 52 per cent volume growth. Maruti now has a market share of about 14 per cent in this segment.

Although the UVs are not expected to continue growing at such a scorching pace this year, the entry into this segment gives Maruti two advantages.

One, UV sales don’t share a liner relationship with car sales, making it a good diversifier. Two, the higher price points of UVs implies better realisations and higher margins.

Financials

For the March 2012 quarter, Maruti’s net sales grew by a reasonable 9.4 per cent over the same period last year to Rs 12,566 crore.

An improved product mix aided top-line growth. Net profits grew by 79 per cent year-on-year to Rs 1147 crore. Operating margins expanded to about 11 per cent compared with 7.5 per cent in the same quarter last year.

The strong footing in the diesel segment, benign commodity prices, favourable exchange rates with the yen and improved localisation were the key reasons for the robust profit growth.

If the Japanese government continues with its quantitative easing policy, a further depreciation of the yen will favour Maruti. Localisation efforts could aid profits as well.

In the March quarter, the import content has come down to 19.5 per cent of net sales from about 26 per cent in the same period last year.

Published on March 12, 2018

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