Maruti Suzuki revs up for better 2016-17

Expanding portfolio, distribution reach should help it capitalise on higher spending from govt sectors

The Maruti Suzuki stock has been outperforming the broader markets since April, with returns of 20 per cent as compared to six per cent gains for the BSE Sensex. This is because of triggers such as the expectation of a good monsoon, Seventh Pay Commission’s award and higher share for Maruti of this expected spending given its government focus, new product launches, and more recently, the hope of GST (goods & services tax) implementation.

Kotak Institutional Equities says Maruti will be a key beneficiary of GST, as tax rates are expected to come down to 18 per cent from the current 24 per cent, which should lead to a reduction of seven per cent in vehicle prices. Given that Maruti has a market share of about 50 per cent in small cars, this move should help it the most.

Across its portfolio of smaller sports utility vehicles (SUVs), light commercial vehicles (LCVs) and mid-sized vehicles, GST should lead to a five per cent weighted average price benefit for Maruti, believe analysts. Maruti is also expanding its presence in the mid-size and compact utility vehicle segments. From 0.8 per cent volumes from utility vehicles in financial year 2011-12 (FY12), the company has increased this to 8.1 per cent in FY16.

Increasing premiumisation of its product portfolio has also helped increase average selling price. BNP Paribas expects the company to maintain its market leadership on new product launches, large dealership and service network, cost leadership because of scale and localisation levels as well as strong brand equity.

What should aid the company’s volume growth in FY17 is likely gains from the implementation of the 7th Pay Commission recommendations. Given the company’s focus on government employees and special offers to them, the share of this segment (currently 16 per cent) to overall volumes should improve.

ICRA expects the passenger vehicle segment to grow 8.5-9.5 per cent (7.2 per cent in FY16) in FY17 on account of declining cost of car ownership (lower fuel price, easing financing cost), improved customer sentiment and likely impetus from the Pay Commission’s award. Given the product portfolio across segments and reach (especially rural areas), expect the company to outperform the sector.

Notably, the company’s focus on fuel efficient cars should help. At the current price, the stock is trading at 19.55 times its FY17 earnings with brokerage target prices around the Rs 4,500. While this indicates limited near-term upsides, investors could use corrections to buy the stock.