Maruti's valuation attractive after 22% fall in stock

Analysts expect auto volumes to recover in second half of FY14; fall in yen to help profitability

At a time passenger vehicle sales have sharply slowed, one would imagine that the outlook would be rather negative for Maruti Suzuki, the largest passenger carmaker in the country. 

 

But a sharp 22% fall in the stock price since February has made the stock attractive, given the company’s performance compared to the sector. The stock is now trading at 13 times its consensus FY14 net earnings, which is a 15% discount to its historical average, says Ashvin Shetty of Ambit Capital. 

 

Undoubdtedly, the auto sector’s sales have contracted sharply in the last four months and the near-term outlook looks as challenging, but analysts expect Maruti to come out of this cycle faster ahead of others. Here’s why: While the sector has grown by 3.9% between April 2012 and February 2012, Maruti has grown by 5.5%. Even in 2013, the decline in Maruti's sales volume is lower than the industry. In the passenger car and utility vehicles segments, the company has expanded its marketshare thanks to its strong product mix (diesel and petrol).

 

Hence, analysts are not very bearish on the stock despite weak sales. Sharekhan says: “Though the sales of petrol vehicle declined 17% year-on-year (YoY) between April 2012 and February 2013, the diesel segment recorded a 27% growth (driven mainly by the utility vehicles).” 

 

Analysts expect the company to fare better than others going ahead. Primary checks done by dealers indicate that the sales have dipped not because purchasing power has diminished but because the sentiment has deteriorated. This should pick up once the economy revives and interest rates come down. Ambit’s Shetty expects the demand for passenger vehicles to return strongly in FY14, underpinned by improved consumer sentiment and interest rate cuts. Sharekhan is assuming volumes of 1.27 million units for FY14 and 1.43 million units for FY15, reflecting a 8.3% and 12.6% growth respectively. 

 

Some of the impact on profitability caused by high discounting could be offset by currency benefits. The Japanese yen has depreciated by 21% against the rupee. The yen’s depreciation has a direct impact in the company’s margins. Raw material imports and royalty payouts are yen denominated and they account for 23% of sales, so any depreciation in the yen has a direct bearing on profitability. Analysts expect a 250-basis-point improvement in Q1FY2014 margin, thanks to favourable currency movement.