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Can Maruti stock continue to roar?

Maruti is on course to sell two million cars by 2020, a 40% jump from the 1.42 million vehicles it sold in 2015-16, reports suggest

Puneet Wadhwa  |  New Delhi 

Multiple triggers for Maruti

Maruti Suzuki hit a 52-week high of Rs 5,103.90 on the National Stock Exchange (NSE) in intra-day deals on Tuesday. From a 52-week low hit on February 29 earlier this year, the stock has rallied around 60% as compared to a 23% rise in the benchmark index, the Nifty 50. By comparison, the Nifty Auto index has also lagged behind, rising around 36% during this period.

Also Read: Maruti launches Swift variant priced upto Rs 6.86 lakh

The overall sentiment for the auto sector has been improving on the back of an above-normal monsoon, which could eventually trigger rural demand for entry level vehicles. That apart, the increased payout in the hands of government employees on account of the 7th Pay Commission recommendation implementation has also bolstered sentiment.

Also Read: How the GST Bill will impact various sectors and stockstesting.. we are here....

The passage of the goods and services tax (GST) bill by the Rajya Sabha, the implementation of which (assuming an 18% tax rate) will also benefit Maruti Suzuki by stimulating demand, analysts say. That apart, there will be gains from savings and distribution, reports suggest.

“Entry level cars would see reduction in on-road prices by around 8%, driving demand for this segment. Maruti Suzuki, which has over 80% of this segment, would be the biggest beneficiary, says a report from Motilal Oswal Research.

Also Read: Small cars, two-wheelers set for a cheaper ride

Another factor driving the positive sentiment has been the acceptance of Maruti’s recent vehicle launches. FY16 saw the highest number of new product launches in a year with the launch of S-Cross, Baleno and Vitara Brezza. These new launches coupled with Ciaz have given Maruti good foothold in the premium segment and it intends to be a key player here.

Can Maruti stock continue to roar?

Also Read: Maruti Suzuki continues to rule passenger vehicle segment

“Business performance in the latest quarter and attractive valuation were the reasons behind such run-up in the last few months. It is one of the few large companies to post double-digit growth in net profits consistently over the last five years, despite overall slowdown in the corporate earnings," says G. Chokkalingam, founder & managing director at Equinomics Research & Advisory.

As per the annual report for FY16 released last week, Maruti is on course to sell two million cars by 2020, a 40% jump from the 1.42 million vehicles it sold in 2015-16. That apart, it plans to launch 15 new cars by 2020 and expanding its sales network.

Also Read: Maruti chalks out road map for growth engine

STOCK STRATEGY

So what should you do with the stock then? Is it still a good buy at these levels?

Better competitive positioning, sharp improvement in return on invested capital (RoIC) and reduced EPS volatility due to lower forex exposure are some of the factors analysts say are likely to work in Maruti’s favour going ahead. However given the sharp rally in the stock, they are cautious on the road ahead.

Analysts at Ambit expect revenue growth at a compounded annual growth rate (CAGR) of 16% between FY16-18, driven by strong franchise and new launches. This, however, will be to be severely undermined by adverse currency impact on margins – FY17/18 at 14.7%, 80 basis (bps) lower than FY16, they say.

Also Read: Maruti Suzuki on track to achieve sales 2 million units

“We expect a modest earnings before interest, taxes, depreciation and amortisation (EBITDA) CAGR of 13% over FY16-18. Capex spends are likely to be elevated due to spends for marketing infrastructure, product development and real estate. However, valuation of 11x FY18E EBITDA (20% premium to five-year historic average) seems to ignore these margin/capex concerns. Our estimates and target price of Rs 4,450 (implied 9.6x FY18 EBITDA) remain unchanged. Maintain sell,” point out Ashvin Shetty, Gaurav Khandelwal and Ritu Modi of Ambit in a recent report.

“The stock is currently trading at premium valuations of around 23x its FY18 earnings – well above historical norms and high for an auto OEM. While Maruti's fundamentals are excellent, we would recommend investors seek a lower price point for entry,” advises A K Prabhakar, head of research at IDBI Capital.

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First Published: Wed, August 31 2016. 22:50 IST
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