Maruti Suzuki: Street ups earnings estimates

Company set to clock double-digit volume growth on demand boost

Analysts have for long believed automobile sales would rebound in FY15 because of latent demand. With the spectre of an unstable government gone and extension of excise sops, consumers have loosened their purse strings. First-time car buyers, too, have come back. Passenger car maker Maruti Suzuki’s sales in June rose 34 per cent year-on-year (y-o-y) to 112,773 units. Domestic sales rose 31 per cent y-o-y during the month to 100,964 units, exports jumped 58 per cent to 11,809 units.

Given the sales momentum in the first quarter, Maruti is likely to end the year with double-digit volume growth. Mauti’s June sales have been driven by the small car segment, especially Alto and WagonR, which grew 52 per cent y-o-y. According to PhillipCapital, the company has also conveyed it saw an improvement in footfall-to-retail ratio last month and with positive model cycle, it may witness strong volume growth momentum in the second half of FY15 and FY16.

  Maruti is planning several new launches over the next few quarters, which would give a further boost to demand. To begin with, the firm is planning to launch Ciaz and SX4 Cross. Maruti volumes declined 1.4 per cent in FY14, as first-time car buyers deferred purchases. The first few months of the financial year are enough to indicate the trend is reversing. Following the June sales data, analysts have increased their volume growth expectations for the full year. Karvy Stock Broking has revised Maruti’s volume expectations by 10 per cent and 12 per cent for FY15 and FY16, respectively; it estimates volumes would grow by 17 per cent a year over FY14-FY16.

Analysts also believe Maruti’s product mix is set for a change. Over time, high-end cars would drive profitability and push up margins. Analysts expect Maruti Suzuki’s domestic passenger vehicle market share to rise 250 basis points over FY14-FY16, driven by better demand from first-time car buyers and new product launches.

Going by the higher-than-estimated volume growth over the next two years, analysts are revising their earnings estimates, too. The company has undertaken several measures such as localisation to improve margins. The Street expects Maruti’s stock to trade at a historical high of 18x PE from the earlier 14.5x. On Wednesday, Maruti shares ended with 2.25 per cent gains.