Maruti Suzuki: Running swiftly

The Maruti Suzuki stock has corrected 15 per cent from its one-year high of ₹5,972 it touched on November 1, 2016. Concerns that demonetisation would hit discretionary spending of consumers has taken the wind out of the stock. But the impact is at best temporary. The company is on a firm wicket otherwise, with an enriched product mix, higher localisation of inputs and upcoming greenfield capacity at Gujarat to ease the long-waiting periods for some of its vehicles.

Hence, long-term investors can treat the fall as a good buying opportunity. At the current price, the stock trades at about 26 times its trailing 12-month earnings. This valuation is in line with the historical average of the last five years and is at a discount to the historical average of 30 times recorded in the last three years.

Incidence of cash purchases is typically lower in cars and utility vehicles (UVs). With their price points being higher than two-wheelers, at least two-thirds of car and UV buys are financed purchases; comparatively, only 35-45 per cent of two-wheeler sales are covered by financing.

Besides, to maintain a trail, a one per cent tax collection at source (TCS) is imposed on any cash purchases (including purchase of vehicles) above ₹2 lakh and all vehicle buys (whether in cash or otherwise) over ₹10 lakh. Hence the incentive to buy cars and utility vehicles in cash is lower than for two-wheelers. The impact of demonetisation on down payments for vehicles, which might possibly be in cash, is at best temporary. Hence, normalcy could return early next year.

Secondly, if the proposed GST rate of 28 per cent on cars were to continue, it will more or less be ‘status quo’ for car prices.

Considering that buyers have been postponing their purchases in expectation of a lower GST rate and hence cheaper cars, this may not be good news; but it is not bad news either and, hence, fence sitters can actually be encouraged to take the plunge in the coming months.

Finally, lower borrowing costs will also help many prospective buyers come into the fray. Improving consumption and sentiments have already resulted in a cyclical upturn in car and utility vehicle sales in the last one to two years. Passenger vehicle sales volumes have grown (year-on-year) from 3.9 per cent in 2014-15 to 7.2 per cent in 2015-16 and further to 11 per cent in the first seven months of this fiscal.

Maruti Suzuki will be a beneficiary of all these trends. With successful launches such as the Celerio (AMT), Ciaz (sedan), SX4 S-Cross ( cross-over), Baleno (premium compact) and Vitara Brezza (UV) in hitherto untouched segments, the company has also been on a strong footing in recent times. The success of the Vitara Brezza, launched in March 2016, has seen the company’s share in the utility vehicle sales move up substantially.

From 14.2 per cent in April-October 2015, Maruti’s share in UV sales volumes has moved up to 24.7 per cent so far this fiscal. Its recent entry into the light commercial vehicle segment with the Super Carry, at a time when LCV sales are looking up, also bode well for volume growth. Despite the demonetisation, the company has managed to clock a 12 per cent volume growth in November 2016. With the company drifting away from a small car focus, fresh worries on rural slowdown may not affect Maruti much either.

Further, planned launches such as the Ignis compact UV in the fourth quarter (January-March 2017), the upcoming petrol variant of the Vitara Brezza and a refresh of the Swift and Wagon R will help maintain robust volume growth.

The first line of the upcoming Gujarat facility with a capacity of 2.5 lakh units is expected to be functional from the end of the fourth quarter. This will help ease the existing capacity constraint in the Gurgaon facility.

A good volume growth of 18.4 per cent and price increases helped Maruti Suzuki clock 29.4 per growth Y-o-Y in net sales to ₹17,594.6 crore in the quarter ended September 2016. The company also took a price increase of ₹10,000-20,000 on Baleno and the Brezza and hikes of ₹1,500-5,000 on other select models in August this year. Average realisation per vehicle improved by 9.3 per cent, aiding the operating margin.

Hence, despite adverse foreign exchange movement, operating margin expanded to 17.3 per cent vis-à-vis 16.5 per cent in the year-ago period. A 50 per cent increase in taxes more than offset by lower depreciation and 71 per cent jump in other income. These factors helped net profit growth zoom by 60.1 per cent to ₹2,398 crore.

In the quarters to come, margins may come under pressure due to increase in commodity prices such as steel.

Costs associated with the Gujarat plant until ramp-up in production volumes, may also pull down the margins. But improved realisations could offset these to an extent.

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