Strong growth justifies Maruti's valuations

Analysts estimate double-digit sales growth and market share gains in FY18

Led by its portfolio of utility vehicles and new vehicle launches, Maruti Suzuki continues to surprise the Street with gains in volumes and market share. The company’s February volumes once again outperformed the domestic passenger vehicle segment with a growth of 12 per cent, while the second largest player, Hyundai, reported a growth of only four per cent  year-on-year (y-o-y). Overall passenger vehicle sector growth is pegged at 8-10 per cent for February.

A large part of Maruti’s performance is led by growth in the utility vehicle (UV) segment, comprising Ertiga, Vitara Brezza, S-Cross and Gypsy brands. The UV portfolio grew 110 per cent y-o-y to 17,863 units in February. The segment now accounts for 15 per cent of the company’s volumes, and its share in domestic volumes has doubled over the past one year. Three years ago, this number stood at about four per cent. The key reason for the recent performance is the launch of its compact sports utility vehicle, Vitara Brezza, about a year ago. The product has emerged the leader in the compact sports utility segment in the past two quarters and has already crossed the 100,000 units mark. Given the outperformance on volumes, the company’s market share has bounced back to 47.3 per cent, up from the six months low of about 43 per cent in October 2016.

The 11 per cent growth achieved in the year-to-date volumes of 1,428,000 units is also ahead of Street estimates. Importantly, most analysts believe the company’s volumes in FY18 will grow by a strong 10 per cent, despite the healthy base of an estimated 1.5 million units for FY17. Maruti would be able to surprise the Street if its Gujarat plant, which has started production last month, is able to ramp up faster than expectations. The recovery after demonetisation, especially in the rural markets which is a focus area for the company, will also help post strong numbers, going ahead. This could give a push to its entry level portfolio of Alto, A-Star and WagonR, where sales have declined 3.35 per cent financial year-to-date.  

The other factor which will help it achieve double-digit growth is new launches. The company recently launched the BalenoRS, the sportier version of its best-selling premium hatch back, Baleno. The new product as well as variants in the past two years in the premium segment and the launch of the new Swift in FY18 should help the company keep both the volumes and premiumisation of its product mix going. This is especially so in product categories such as sedans and premium utility vehicles, where it was not considered a key player. Its sedan Ciaz, for example, sold 14 per cent more in February over year-ago period and year-to-date sold nearly 60,000 units, which is 22 per cent more than the year ago-period. Ciaz was launched in October 2014. 

In fact, more volumes for high margin products Vitara Brezza and Baleno, which have a waiting period of five-six months, should help keep the operating profit margins strong, which have have increased from 10.8 per cent in FY15 to 13.3 per cent in FY16 and are expected to be about 14 per cent in FY17. Analysts believe the company can maintain margins despite commodity cost pressures, which reflects strong demand and, therefore, pricing power.

Investors, however, will have to be mindful of the fact that the stock valuations at 21.5 times its FY18 net profit estimates are on the higher side. However, Amyn Pirani and Srinivas Rao of Deutsche Bank believe Maruti’s strong volume/mix momentum relative to the industry and its ability to manage currency risks (unlike in the past) should sustain stock price performance despite near-peak valuations.