Maruti Suzuki India - Buy. Good run to continue

A lot of things have been going right for Maruti Suzuki in recent times. Successful launches, increase in market share and expanding operating margins have benefited the company during what has been tough times for the auto industry.

With domestic vehicle sales on a cyclical recovery path, the good run is expected to continue. Improved consumer sentiments from lower inflation and interest rates, and launches lined up in hitherto untouched segments will stand the company in good stead in the months to come.

Investors with a one-two year perspective can buy the Maruti Suzuki stock. At ₹3,732, the stock trades at about 21.5 times its estimated earnings for 2015-16. The one-year forward valuations have moved up from the level of 17 times seen a year ago.

But the current valuation is still reasonable, considering the better prospects for Maruti compared with other listed auto manufacturers such as Mahindra and Mahindra, Bajaj Auto and Hero Motocorp.

In the April 2014-March 2015 period, Maruti Suzuki’s volumes grew by about 11 per cent, higher than the industry growth of 4 per cent for the passenger vehicles segment (comprising cars, utility vehicles and vans). The growth was predominantly supported by new vehicle launches such as Celerio (with Automated Manual Transmission) and the Ciaz sedan. Refresh of the Alto K-10 and an upgraded Swift also helped volume growth.

Thanks to these introductions, the company improved its market share last fiscal. After dipping to below 40 per cent in 2011-12 and 2012-13, its market share inched back to 42 per cent in 2013-14 and stands at 45 per cent for the year ended March 2015.

In the months to come, planned launches should continue to support volume growth. The company will bring out its first crossover vehicle, the SX4–S Cross shortly.

The much awaited compact SUV launch, launch of a premium hatchback car and facelifts of vehicles such as the Ertiga and Ritz will also happen this fiscal year. The shifting product mix towards sedans and utility/crossover vehicles also means that the company will be less affected by a slowdown in rural sales, where cars with lower price points are more in demand.

Crop damages from the recent unseasonal rains are expected to dampen rural market demand in the next few months. On the other hand, factors such as lower inflation and interest rate cuts should nudge urban consumers to loosen their purse strings.

Thanks to these positive factors, Maruti expects to again outpace industry growth this year. While the Society of Indian Automobile Manufacturers (SIAM) projects domestic passenger vehicle sales volumes to grow 6-8 per cent in 2015-16, the company expects volume growth to be higher at about 11 per cent.

Exports will also do their bit. The company’s exports volumes grew 20 per cent in 2014-15 after it introduced models such as the Swift, Dzire, Ertiga and Ciaz in major African and Latin American markets. It expects similar growth this year too. Exports bring in 10 per cent of the total revenues.

For the quarter ended March 2015, net sales grew 12 per cent over the March 2014 quarter to Rs 13,272 crore. Net profits jumped a high 60 per cent to Rs 1,284 crore. The top line growth was supported by 7 per cent growth in volumes and 5 per cent increase in average realisations year-on-year.

Operating margin at 15.8 per cent was much higher than the 10.4 per cent a year ago – this was supported by higher realisations, lower input costs and favourable forex movements.

High margins for the company should sustain. For one, higher realisations from a richer product mix comprising sedans and utility/crossover vehicles will help. This should also counter the reduced attractiveness for diesel vehicles, which enjoyed better margins.

Next, a pipeline of new launches and improving demand will bring down discounts being offered currently. Already, average discounts have cooled off to Rs 15,000 in the March 2015 quarter from about Rs 21,000 in the December 2014 quarter.

Also, the company has reduced its import content in raw materials to about 16 per cent currently from about 20-25 per cent two-three years ago.