Investors with a medium-term outlook can consider taking exposure in the stock of Maruti Udyog Ltd. The stock trades at a little over 15 times its trailing 12-month earnings. With market conditions turning volatile, the stock of Maruti Udyog could remain vulnerable to short-term price fluctuations.
However, the medium-term outlook for the company's earnings appears reasonable, in light of increasing traction in compact car sales, good market response to the Swift Diesel variant and the likelihood of new product launches over the next few months.
The recent price decline in the stock appears to be triggered by short-term factors. The Maruti Udyog stock has declined by about 16.3 per cent from February 9, even as the benchmark BSE Sensex has slid about 12.5 per cent from its all-time high. The relative underperformance of the stock seems to have been influenced by two factors.
First, the poorer than expected performance of the Suzuki Zen Estilo, the newly launched replacement for the Zen small car, has affected the stock. Secondly, it was widely expected that the Union Budget would come up with a further round of sops to boost small car manufacturers, a proposal that would have potentially made Maruti one of the biggest beneficiaries. But the lack of any incentives for passenger car manufacturers in the Budget proved to be a big dampener of sentiment in the Maruti stock.
However, there could be a reversal in sentiment for the stock with a couple of positive new developments in the company. For one, Maruti's launch of the Swift diesel has been well received in the market. And contrary to the company's earlier experience with the Zen and Esteem diesel versions, the Swift diesel has found willing takers. There is a three-month waiting period for the model both due to robust demand and low engine assembly capacity. With the likelihood of the new, attractively styled SX4 sedan being launched in May this year in both petrol and diesel versions; the company could break into this segment, where its only entry is the Esteem, as of now. The Nissan small car OEM contract that will commence late next year would also improve capacity utilisation and profitability at the company's facilities.
In the meanwhile, while the sales of the Maruti 800 (currently the world's cheapest car) have been slipping every month, the Alto has been gaining ground and has managed to bolster Maruti's sales numbers. The Alto's sales numbers recently crossed two lakh units for the 11-month period till February this year. The car could replace the M800 as the Maruti's entry-level car and prove to be the company's best bet to take on new competition.