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The Maruti Suzuki stock has been touching its 52-week highs recently and since September 2013 has been one of the outperformers in the auto space, gaining 43%. The stock is up a per cent over the last couple of days on the back of a good domestic performance for December.
The gains over the last few months have come on the back of its ability to improve its market share despite stiff competition, a weaker yen, rising share of rural sales and expectations of a sales rebound in FY15. Sharekhan analysts believe that higher than expected volume growth in FY15 and margin expansion could lead to an upgrade in earnings estimates for MSIL and the consequent re-rating of its stock over the next few quarters.
While there is little doubt on the positives (product pipeline, growth potential, distribution edge), given the steep run up in share price, investors should await better opportunities to enter the stock.
Analysts led by Ambrish Mishra of JM Financial, who have a buy on the company with a target price of Rs 2,105 for March FY15, say that they don't rule out near term price correction considering the sharp outperformance (20%) to BSE Sensex over the last quarter and prevailing demand/competitive challenges.
Rohan Korde of Anand Rathi says that that the current price factors in the short-term positives, while possible downgrades in sales estimates have not yet been fully captured. Even the pick-up in exports is not likely in the near term. The research firm has a sell on the stock with a target of Rs 1,398.
Strong growth in FY15?
For the year to date (March to December 2013) period, volumes for Maruti have been muted, with the company registering a 0.7% overall growth year-on-year. For the domestic market, however, the number is slightly better at 1.7% albeit on a low base. Even for the month of December, poor show in exports saw Maruti register 4.4% fall in overall volumes. However, led by the mini segment and Dzire, domestic segment surprised positively with a 5.5% growth year-on-year.
Analysts believe that the company's domestic performance was largely due to its rural presence, which benefited from good monsoon and strong agricultural growth. About 30% of Maruti's sales are from the rural segment. Thus, even though near term outlook is not too good, the company is planning to aggressively increase its rural presence in an effort to boost falling sales volumes, say Kotak Institutional Equities analysts.
The company is planning to launch 14 new vehicles over the next five years both in its core compact small car portfolio as well as in the UV and sedan space, which is expected to improve its realisations. The company's plans to double its exports contribution as a percentage of sales from the current 10% to 20% over the next four years and to turn India into a manufacturing hub for exports is a positive.
The biggest trigger, however, is the recovery in domestic demand. Sharekhan analysts expect domestic passenger vehicle demand to recover in FY2015 on the back of improving macroeconomic conditions and the low base over the last two years. Annual growth, which for FY14 has thus far been flat, is expected to move up in line with historic growth of 10-12%. For the year to date period, the company has gained market share to the tune of 271 bps to 41% while volume growth has been muted at a per cent. While the company benefited from favourable forex movement and cost reduction measures in the September quarter and Ebdita margins improved 120 basis points on a sequential basis to 12.6%, the gains are unlikely to sustain given demand pressures, low capacity utilisation and the inability of the companies to pass on input cost pressures.
