Multiple triggers for Maruti

Migration up the value chain and success of new products to boost realisations, margins

The Maruti Suzuki stock hit its lifetime high recently on favourable news flow, as well as triggers which should help the company outpace industry growth. While it is expected to be a beneficiary of the coming national goods and services tax (GST), what is helping it reap the gains is a shift in customer preference towards petrol-driven vehicles and value migration to higher-priced segments. Maruti is also well placed with a portfolio that will help it gain from recovery in rural demand and pay commission hike.

First, the GST gains. If implemented at an 18 per cent rate, Maruti would benefit the most among auto companies, says IDBI Capital. For, it has the highest share of sub-four metre cars, which should attract 18 per cent, as opposed to the 40 per cent for larger vehicles. Pricing could fall by about 10 per cent, both on account of the new rate and the savings from distribution and logistics, estimate analysts. Given stiff competition, CRISIL Research expects companies to pass on the gains, which should help boost volumes.

The shift to petrol engines, both on account of bans on diesel vehicles in some states and  shrinking of the price gap between petrol and diesel, should benefit Maruti. As against 59 per cent of petrol-driven vehicles for the sector, nearly 70 per cent of Maruti’s sales come in this category. Rivals have to catch up to come up with petrol versions; Maruti has a large portfolio here.

One key reason for the Street’s optimism on Maruti has been its successful migration to high-value segments. Its most recent launches of the Brezza, Baleno and Ciaz, were successful. The first two have a waiting period exceeding six months. Strong demand from the new launches helped it show a 14 per cent year-on-year volume growth in July. Buoyed by the response, Maruti has readied the launch of a mini sports utility vehicle, Ignis. The success of the new launches not only helps plug the portfolio gap but adds to volumes. It also increases the company’s realisations and margins, especially from export of the Baleno. It is the launches in the premium compact segment which will help Maruti hold on to the margins, despite pressures on the currency and commodity fronts. The company is positioning the Baleno and S-Cross (10 per cent of its domestic volumes) as premium vehicles.  

Maruti is expected to outperform the sector in FY17, with volume growth at double digits. Significant, as its year-on-year sales growth in the first four months of the current financial year has been only 7.7 per cent, though a small part of the lower sales can be attributed to the impact from disruption of supply from one of the component providers. Analysts at IDFC Securities say the company is well placed to benefit from a potential improvement in passenger car volumes, on the back of a robust product line and a strongly competitive position.

Effective August 1, Maruti has hiked prices by Rs 1,500-Rs 5,000 (ex-showroom Delhi) across models; Brezza and Balena prices hiked by Rs 10,000-Rs 20,000.

The stock is currently trading at 22 times the FY18 earnings estimate. After the re-rating, most analysts have pegged the target price upwards of Rs 5,100, which indicates limited upside. Hence, long-term investors could consider it on declines. However, if the new launches click and it is able to garner further market share, the stock could surprise on the upside.