Maruti Suzuki: More buyers for Maruti cars to draw in more investors

ET Intelligence Group: A blend of volume and margin growth is likely to keep investor interest high in Maruti Suzuki. That will allow analysts tracking the company to ascribe a higher price-earnings (PE) multiple to arrive at a fair value for the nation’s top car producer. The stock is trading at 23 times its projected fiscal 2019 earnings and a 33 per cent premium to its five-year average PE movement.
Maruti has outpaced the BSE Auto index and the Nifty by a wide margin since the beginning of 2017, and remained one of the most preferred auto stocks despite the continued outperformance. This can be gauged from the fact that nearly 71 per cent of analysts covering the company have a Rs buy’ rating on it.

Several multinational brokerage houses, including Morgan Stanley, Goldman Sachs, CLSA and Jefferies, have their target price north of Rs 9,000 for the stock that ended Wednesday at Rs 7,733.90 on the BSE.

Maruti’s monthly run-rate of the volumes in the past two months has been around 165,000 units, or 26 per cent higher than the monthly run-rate of the previous quarter. Normalised wholesale volumes -vehicles that the company has sent to dealers -after the GST transition and channel filling by the dealers ahead of the festivals are expected to improve volume growth. Also, the share of entry-level cars in its sales volume has dropped by 400 basis points in the current quarter. This has been compensated by the rising share of premium cars with no-discounts, such as the Baleno, Vitara Brezza, and Ignis -most of these cars, which offer a bigger mar gin than small entry-level hatchbacks, have a waiting period of 4-20 weeks.

The rising share non-discounted vehicles is likely to lower the average discount per vehicle, which was Rs 16,600 in the April-June quarter. This also could augur well for the margins.The Street is pricing in volume growth of 12-14 per cent and an operating profit margin of 15.2 per cent for the current fiscal year. Operating profit was 13.29 per cent in the first quarter of FY18, compared with 15.06 per cent on average in the previous six quarters.

On the other hand, the operating margin has potential to reach a record high in the next two years, once the utilisation rates at the new manufacturing plant in Gujarat picked up.

Maruti’s parent, Suzuki Motor, had earlier this year commissioned the first phase of its new plant in Gujarat.It is proposed to have three phases, with each adding 250,000 units to capacity. The vehicles will be supplied to Maruti, which already has capacity to manufacture 1.5 million units.

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