Maruti Suzuki India: In full throttle - Buy

Even as two-wheeler makers such as Bajaj Auto and Hero MotoCorp are struggling with thin demand, Maruti Suzuki India is on a strong wicket, thanks to a cyclical upturn in car sales.

Apart from a revival in sales volumes, successful car launches, easing of raw material costs and higher localisation of inputs have also been fanning earnings growth for the company. With the auto industry still in the early days of revival and Maruti also enriching its product mix in recent times, the good run is expected to continue for the company. Investors with a one-two year perspective can buy the stock.

At the current price, it trades at about 30 times its trailing 12-month earnings and 25 times its estimated earnings for 2015-16. This valuation is higher than historical averages.

But then, many auto and auto component stocks have been re-rated in the last two years, on expectations of a strong bounce back in growth after the earlier downturn. With double-digit profit growth in the last few quarters and strong prospects ahead, Maruti should deliver healthy returns to investors.

After the slowdown during 2012-2014, domestic car sales have steadily turned around in the last one-and-a-half years. As against a 5 per cent shrinkage in sales volumes in 2013-14 (over the previous year), the car industry recorded a 5 per growth in 2014-15 and has gained further ground with a 9.7 per cent growth in the first six months of this fiscal.

Maruti, the market leader, has outdone industry growth during this turnaround. While its passenger car sales grew 9 per cent last fiscal, it inched up 12.5 per cent for the six months ended September 2015.

Thanks to this outperformance, Maruti’s market share has been steadily improving. For the first six months of this year, it stands at 53.4 per cent.

Timely launches and that, in newer segments have stood the company in good stead in this period. While the Celerio became a hit with customers because of its Automated Manual Transmission (AMT) technology, the Ciaz strengthed the offering of this small-car maker in the ‘sedan’ space. The SX4 S-Cross took Maruti into a whole new cross-over vehicle segment.

The cyclical turnaround in car sales along with improved consumer sentiments from an easing of inflation and interest rates should aid double-digit volume growth for Maruti in the next few quarters. Launches will do their bit too.

The company has recently brought out Baleno, its premium hatchback vehicle, and is scheduled to come out with a compact utility vehicle soon.

To help maximise sales in metros and tier 1 and tier 2 cities across the country, Maruti is pushing its premium vehicles such as the SX4 S-Cross and Baleno through the new NEXA outlets. Finally, while weak rural demand has hurt motorcycle sales, rural demand for Maruti’s vehicles has been better than urban demand in recent times.

The company has seen a 10 per cent volume growth in rural areas vis-à-vis a 4 per cent urban growth in the quarter ended September 2015.

A continuation of this trend will help the company fire on all cylinders by pushing up its small car sales as well.

With demand picking up and higher realisations kicking in from an improved product mix, the company has been recording 10-15 per cent top-line growth in the last four quarters.

These, along with fall in raw material prices have aided margin expansion and strong bottomline growth.

In the latest September quarter, Maruti’s top line grew 13 per cent to ₹13,575 crore over the September 2014 quarter. Operating margin moved up to 16.7 per cent vis-à-vis 12.7 per cent a year ago. Net profit grew at a healthy 42 per cent to ₹1,225 crore.

Going forward, commodity prices are expected to remain stable, if not move up. Hence, a major portion of the benefits of low input prices has already been captured. Ditto with the localisation efforts.

The company has reduced its import component of raw materials to around 15 per cent currently from about 20-25 per cent two-three years ago. A substantial reduction from hereon may not be possible.

But operating leverage from growing volumes and higher realisations from the improving product mix should continue to support strong profitability for the company.