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Maruti Suzuki was the highest gainer among Sensex stocks, gaining 11 per cent last week on hopes of turnaround in volumes on the upcoming festival season, steady performance in rural segment and reasonable valuations. The company, which is struggling to cope up with the demand slowdown, saw its domestic volumes for the April to August period grow by 3 per cent year on year albeit on a low base.
While overall growth has been muted, the company’s rural sales which account for about 30 per cent of volumes, are growing at a healthy pace. Binay Singh and Yashesh Mukhi of Morgan Stanley say that sales volume in the rural segment is up 20 per cent year on year for the fiscal year to date as against 3 per cent overall growth for the company even though interest rates are higher in rural areas.
Though rural sales are holding up, the company is banking on festival season as well as new launches such as Wagon R Stingray to improve its sales numbers. While Maruti has a number of advantages given its wide portfolio and reach over its competition and could benefit from a demand revival, the poor sales performance in the fiscal reflected in the share price which is down 25 per cent since its May highs.
However CIMB analysts Pramod Amthe and Kunal Jhaveri believe that the Street has already factored in the worst. The key catalysts, according to them, are favourable price to book valuations and festival demand revival. The stock is trading at 1.6 times its estimated FY15 book value (6-year range 2.5 times) and 10 times its price to earnings estimates.
Rural edge
With monsoon rainfall at 5 per cent above normal and increasing presence of Indian companies in rural areas, Deutsche Bank analysts believe that the same will have a multiplier impact on the economy. In a report on rural demand, Deutsche Bank’s Abhay Laijawala and Abhishek Saraf say that with urban India seeing muted growth on rising interest rates and high inflation, investors must focus on companies which have invested in building a presence in rural India.
Maruti is one of its rural picks which they say should be a key beneficiary in the sector. In fact, Maruti Suzuki’s presence in rural areas and its entry level product portfolio has helped it to increase the contribution from rural areas to domestic volumes from 4 per cent in FY 2008 to 28 per cent in FY13. Going ahead, the company is enhancing its distribution reach by more than doubling its presence from 45,000 villages last year to about 100,000 villages this year.
Traditional strongholds perform
As has been observed with two wheelers, consumers tend to stick with trusted brands and downtrend to lower cost vehicles during a slowdown. Unlike the newer models of the company such as Ertiga and Ritz which has been pegged back by competition, its year-to-date sales growth is largely coming from Dzire, Wagon R and the Alto. Say Morgan Stanley analysts, “Faced with economic headwinds, the consumer is turning risk averse and returning to legacy brands, helping companies such as Maruti Suzuki gain market share.” The research firm cites the example of the Swift Dzire which saw its market share grow to 20.4 per cent from 17.3 per cent in the April to July period from 17.3 per cent in FY13 as sales growth outpaced segment growth.
Tough environment, festival sales key
While Maruti Suzuki’s strengths continue to be its product portfolio and distribution network, it faces a number of headwinds. For one, its share of the profitable diesel variants of its products (Dzire, Ertiga and Swift) is coming down. From a high of 36 per cent in FY3, diesel vehicle proportion of overall sales volume is likely to shrink to 31 per cent in the September quarter, feel CIMB analysts as higher diesel prices have led to a fall in diesel vehicle demand.
Secondly, higher average discounts which were in the range of Rs 13,400 per vehicle in the June quarter are expected to increase by over 20 per cent in the September quarter, impacting margins. The poorer product mix and the currency impact could see the company report a drop in margins to the tune of 100bps in FY14. While the appreciation of the Indian rupee has given it some elbow room, analysts say optimizing its product mix and localization of import content are the only ways in which the company can improve its margins.
While price hikes is another lever, given competitive pressures and slowdown in demand, the company is unlikely to resort to hikes any time soon. Among product launches, the company has lined up a new small car to be launched in the March quarter of FY14 and a crossover in FY15.
