No near-term upside for Maruti Suzuki

Given the stock's 45% rise since September, some analysts do not rule out price correction in the short term

The Maruti Suzuki stock has been touching 52-week highs recently. Since September 2013, it has been one of the outperformers in the automobile space, gaining 45 per cent. The stock is up over one per cent in the past two days, on the back of a good domestic performance in December.

The gains over recent months have been due to the ability to improve market share despite stiff competition, a weaker yen, rising share of rural sales and expectations of a sales rebound in FY15. Sharekhan analysts believe higher than expected volume growth in FY15 and margin expansion could lead to an upgrade in earnings estimates for MSIL (Maruti Suzuki) and consequent re-rating of its stock over the next few quarters.

  While there is little doubt on the longer-term positives (product pipeline, growth potential, distribution edge), , investors should await better opportunities to enter, given the steep run-up in share price. Analysts led by Ambrish Mishra of JM Financial say they don’t rule out near-term price correction, considering the sharp outperformance (20 per cent) to the BSE Sensex over the past quarter and demand/competition challenges. Rohan Korde of Anand Rathi believes the current price factors in the short-term positives but possible downgrades in sales estimates have not been fully captured. Even a pick-up in exports is not likely in the near term.

While the stock at the current level of Rs 1,807 is trading at 17.2 times its FY15 estimates, given the Bloomberg consensus price at Rs 1,754 and no short-term triggers, investors are better off picking it after correction.

For the year-to-date (March to December 2013) period, volumes for Maruti have been muted, with the company registering 0.7 per cent overall growth. For the domestic market, the number is slightly better at 1.7 per cent, albeit on a low base. Even for December, a poor show in exports saw a 4.4 per cent fall in overall volume. However, led by the mini segment and the Dzire, the domestic segment surprised positively with a 5.5 per cent growth over a year.

Analysts believe the domestic performance was largely due to its rural presence, which benefited from a good monsoon and strong agricultural growth. About 30 per cent of Maruti’s sales are from the rural segment. Thus, though the near-term outlook is not good, the company is planning to aggressively increase its rural presence to boost falling sales volumes, say Kotak Institutional Equities analysts.

The company is planning to launch 14 new vehicles over the next five years, both in its core compact small car portfolio and in the UV (utility vehicle) and sedan space, which is expected to improve its realisations. The company’s plans to double its exports contribution as a percentage of sales from the current 10 per cent to 20 per cent over four years and to turn India into a manufacturing hub for export is a positive. All these should help boost growth in the long run.

The biggest trigger, however, is the recovery in domestic demand. Sharekhan analysts expect domestic passenger vehicle demand to recover in FY2015, due to improving macro economic conditions and the low base over two years. Annual growth, which for FY14 has thus far been flat, is expected to move up in line with historic growth of 10-12 per cent. Maruti is the leader in passenger vehicles and should benefit from a rise in demand, aided by its strong understanding of customer needs, distribution and service reach and new products. For the year-to-date period, the company has gained 2.7 per cent market share to 41 per cent, even as volume growth has been muted.

However, in the next couple of quarters, the outlook remains benign, say analysts. While the company benefited from favourable forex movement and cost reduction measures in the September quarter and Ebitda (operating earnings) margins improved 120 basis points on a sequential basis to 12.6 per cent, the gains are unlikely to sustain, with demand pressures, low capacity utilisation and the inability of companies to pass on input cost pressures. Given high inflation (and, hence, interest rates) and weak economic growth, any recovery in demand is unlikely before the second quarter of calendar year 2014. It is likely to see some traction only after the general elections.