Maruti's valuation attractive after 22% fall in stock

At a time when passenger vehicle sales have sharply slowed, one would imagine the outlook would be rather negative for Maruti Suzuki, the largest passenger carmaker in the country. But a sharp 22 per cent fall in the stock price since February has made it attractive, given the company's performance compared to the sector. The stock is now trading at 13 times its consensus FY14 net earnings, a 15 per cent discount to its historical average, says Ashvin Shetty of Ambit Capital.

Undoubtedly, the auto mobile sector's sales have contracted sharply in the past four months and the near-term outlook looks as challenging. Yet, analysts expect Maruti to come out of this cycle faster then others. Here's why: While the sector grew by 3.9 per cent between April 2012 and February 2013, Maruti grew 5.5 per cent. Even in 2013, the decline in Maruti's sales volume is lower than the industry. In the passenger car and utility vehicles segments, the company has expanded its marketshare thanks to its strong product mix (diesel and petrol).

Hence, analysts are not very bearish on the stock, despite weak sales. Sharekhan says: "Though the sales of petrol vehicle declined 17 per cent year-on-year (y-o-y) between April 2012 and February 2013, the diesel segment recorded a 27 per cent growth (driven mainly by the utility vehicles)."

Going ahead, analysts expect the company to fare better than others. Primary checks by dealers indicate sales have dipped not because purchasing power has diminished but because the sentiment has deteriorated. This should pick up once the economy revives and interest rates come down. Ambit's Shetty expects the demand for passenger vehicles to return strongly in FY14, underpinned by improved consumer sentiment and interest rate cuts. Sharekhan is assuming volumes of 1.27 million units for FY14 and 1.43 million units for FY15, reflecting a 8.3 per cent and 12.6 per cent growth, respectively.

Some of the impacts on profitability caused by high discounting could be offset by currency benefits. The Japanese yen has depreciated by 21 per cent against the rupee. The yen's depreciation has a direct impact on the company's margins. Raw material imports and royalty payouts are yen-denominated and account for 23 per cent of sales, so any depreciation in the yen has a direct bearing on profitability. Analysts expect a 250-basis-point improvement in the June quarter's margin, thanks to favourable currency movement.