Maruti Suzuki: Ertiga may boost volumes

While rate cuts are positive for the automobile sector, the stock?s recent rally could cap future gains

For Maruti Suzuki, FY12 started on a dour note. From adverse currency movement to higher royalty payouts and industrial action, the company saw it all. Though Maruti’s car volumes dipped 11 per cent, analysts believe it stands to benefit from the sale of diesel cars and the launch of its new utility vehicle, Ertiga. The stock has run up 39 per cent year-to-date in anticipation of a rate cut. Though it ended flat after Tuesday’s 50-basis-point cut, analysts believe a rally could break out in the short term. The stock trades at a 40 per cent premium to peers.

The stock is trading at 15 times its FY13 earnings, higher than the historical average of 14 times. So, is this premium justified and would it sustain? For FY13, Kim Eng Securities is factoring in a 16 per cent year-on-year growth in volumes (1.3 million units) compared to 10 per cent for the passenger car segment. Additionally, FY12 margins, at 7.3 per cent, have come in well below their historical average of 11 per cent.

Ertiga’s launch is very crucial for the company, as utility vehicles are growing at a faster pace than passenger vehicles and account for nearly 14 per cent of the entire passenger vehicle market. HSBC Global Research believes this is a growth market where Maruti has a negligible presence. “Ertiga could provide a new market category and another leg of growth for Maruti, which should be largely complementary to existing sales. From a long-term perspective, the pricing and product are in the mid-range segment and do not push Maruti’s portfolio into the higher-end market,” adds HSBC.

Analysts believe the company’s entry into this segment is positive, as it will not cannibalise any other segment. However, a lot depends on margin recovery. According to a report by Jefferies: “The recent earnings forecasts have seen massive volatility due to a highly volatile currency. The stock trades at a premium similar to the historical average.” At the current market price, analysts believe further upside is capped.