Maruti Suzuki

The stock of Maruti Suzuki is one of the outperformers in the BSE Sensex basket over the past year. But the stock remains a preferred exposure to capitalise on the recovery in automobile sales. Though concerns about a deficient monsoon and a slowdown in exports next year have tended to impact the stock’s performance in recent weeks, the company appears well placed to weather both risks and still deliver strong growth.

Investors with a moderate return target (10-15 per cent) can consider buying the stock currently at Rs 1467. This translates into a PE multiple of 32 times trailing 12-month earnings, but one should keep in mind that earnings for the company remained depressed for most part of last year.

The company’s formidable array of products not only shielded it from the slowdown in demand last year but also helped expand its market leadership in the A2 and A3 car segments. The strong financial performance despite the input cost continuing to remain stiff is yet another comforting factor for investors. However, given the way the stock price has shot up in recent times, it may be ambitious to expect big returns in the near future.
Line ‘em up

From enjoying a 51.3 per cent market share in the A2 segment in 2007-08, Maruti Suzuki saw its market share dipping to 46.8 per cent last year. However, the launch of A-Star and Ritz has helped Maruti quickly regain lost ground and its market share now stands at 53.3 per cent in the A2 segment. This apart, the company also holds leadership in the A3 or the entry-level sedan segment, with models such as the SX4 and Swift Dzire keeping demand buoyant. Maruti’s market share in this segment is 42.7 per cent.

Though Tata Nano was perceived to be a big threat to Maruti initially, by taking away entry-level car buyers, concerns on this front have been reduced by the fact that most of the bookings for the Tata Nano have been for its high-end variant.

With the price differential between high end Nano variants and Maruti’s basic Alto quite narrow, a drastic shift to the former appears unlikely. Diesel cars, which are grabbing an increasing share of the A2 and A3 car segments, may have also helped the company maintain its position, given that Maruti’s top selling models such as Swift, A-Star, Ritz and Swift Dzire come in diesel variants.

Year 2010 may see the unveiling of Suzuki Kizashi in India. This will mark the company’s entry in the premium sedan or the A4 segment. Given that Kizashi is pitched against cars such as Toyota Corolla Altis, Honda City and Skoda Octavia, breaking into this segment may take time.

With small cars hogging the limelight world over, Maruti plans to expand its production capacities and invest more on its research and development activities. The company will deploy Rs 1,000 -Rs 1,500 crore, for the R&D unit with a dedicated suppliers’ park and test-track in Rohtak. The company’s low debt:equity ratio and annual cash flows of over Rs 1,000 crore from operations, suggest that the funding may not impose much of a burden. The recently developed Manesar plant will see an increase in its production capacity, as the company proposes to gradually shift some of its output from the Gurgaon plant.
Some concerns

Rural and semi-urban demand played a crucial role in Maruti weathering a tough market last year. Currently rural and semi urban markets contribute 12 per cent of the company’s total sales. While the deficient monsoon may impact rural sales temporarily, this impact is likely to offset by improved agricultural credit, the NREGA programme and accelerated government spending on rural infrastructure projects.

The payment of the second tranche of Pay Commission arrears over the next couple of months, combined with currently low interest rates, may also give a renewed boost to urban demand.

Exports account for 10 per cent of the company’s total sales and have been a growth driver for Maruti in recent months.

At present, over 90 per cent of the cars are shipped to Europe. This trend may sustain till December 2009 or possibly till March 2010, aided by the scrappage incentives currently being offered by Governments in many European countries.

However, Maruti may face some uncertainty next fiscal, once these incentives are withdrawn. The company’s strategy of expanding its target markets into Australia, West Asia and parts of Latin America may help reduce a huge blip in exports.
Financial overview

The first quarter of FY-10 saw the company deliver strong profit growth after closing the previous fiscal year with a 30 per cent profit decline. Aided by excise duty cuts, net sales grew by 34 per cent, while net profit expanded by 25 per cent.

In terms of risks, the company will continue to face operating cost pressures, as the cost of raw materials such as, aluminium alloys and rubber have gone up by more than 50 per cent from their lows. A change in product mix in favour of diesel variants will also add to cost. A sharp upward spiral in interest rates may also curb demand in the hatchback segment.

via BL