What Goes In Maruti Suzuki’s Favour As Auto Shares Rebound

Investors retained faith and shares of India’s largest automaker have pared nearly all the losses of the year. The stock surged nearly 33 percent from its July lows, aided by corporate tax cuts. Analysts expect new models from the maker of Swift Dzire and a potential revival in rural demand to aid rebound.

Twenty-seven of the 52 analysts tracking the stock recommend a ‘Buy’, while 10 suggest ‘Hold’ and 15 have a ‘Sell’ rating, according to Bloomberg data. The stock trades at 27 times its earnings, higher than its five-year average of 23 as well as at a premium to peers in India and around the world.

The optimism for the company that makes every second car sold in India comes at the end of a tumultuous year for Indian carmakers grappling with the worst slump in at least two decades. Volumes tumbled as Indians curbed spending as wages stagnated amid an economic slowdown. A liquidity crunch, triggered by defaults at IL&FS Group last year, only made matters worse and growth fell to its lowest in more than six years to 4.5 percent in July-September quarter.

Here are some other factors that may help Maruti Suzuki.

New Models

Maruti Suzuki’s volumes have tumbled 13 percent so far this year. Sales either remained flat or tumbled in the last 17 months, barring October when it saw a festive uptick.

JPMorgan in a note said volumes have bottomed out and may recover from next year. Recent volume levels are encouraging, reflecting some stabilisation after steep decline/production cuts taken earlier in the year, the brokerage said in a report. The key drivers of improvement, it said, would be easing of financing environment—especially on down payments—and clarity on regulations such as Goods and Services Tax rate cuts, Bharat Stage-IV emission norms.

One reason for optimism around Maruti Suzuki are its new launches. The S-Presso, the carmaker’s so-called mini sports utility vehicle, has received a good response. The company, according to its media statement, has sold more than 10,000 units of the vehicle for the third straight month.

Maruti Suzuki will launch the petrol version of Compact SUV Vitara Brezza in February next year and the electric version of Wagon R in October 2020, besides its launches in collaboration with Toyota.

Inventory Management

As sales fell, automakers offered discounts and halted production to pare inventory. Maruti Suzuki was among them.

Passenger vehicle dealers now hold 25-30 days of inventory, down from the peak of 50-60 days in February, according to Federation of Automobile Dealers Associations of India. Maruti Suzuki’s inventory days stood at 20-25 days as of November 2019, a company dealer told BloombergQuint.

Diesel Exit Not A Big Setback

In May, RC Bhargava, chairman at Maruti Suzuki, said the company would stop making diesel cars by April next year. That’s because of the lower fuel-cost arbitrage and an expected rise in the cost of manufacturing BS VI-compliant diesel engines.

The company, however, had started transitioning towards petrol variants much before the rollout of BS-VI norms from April 1, 2020. While Maruti Suzuki plans to launch a BS-VI petrol variant of its Vitara Brezza and the S-Cross early next year, it is also placing its bet on CNG models.

According to JPMorgan, the share of diesel cars to overall sales fell to 20 percent this year from the peak of 37 percent in 2012-13. With reliance on diesel portfolio falling, JPMorgan said concerns around Maruti Suzuki’s move to phase out diesel cars from its portfolio are “exaggerated”.

It also expects an increase in rural demand on account of better crop prices and the government’s farm push to aid volumes.

Recovery In Margin

Maruti Suzuki’s margin fell to its lowest in 26 quarters in the three months ended September at 9.6 percent. That was, however, higher than the average of analyst forecasts tracked by Bloomberg.

According to Jefferies, lower employee and other expenses, cost cuts and price hikes will aid the company’s margin. Morgan Stanley estimates Maruti Suzuki’s margin to rise with better volumes ahead as that would improve its operating leverage. According to Nomura, benign commodity prices would also help Maruti Suzuki boost its margin.

According to JPMorgan, margins bottomed in the second quarter and will improve on better operating leverage, falling discounts, benign raw material prices, cost cuts and lower royalties will.

• JPMorgan raised its target price for the stock to Rs 8,200 apiece, implying an upside of 12 percent.
• Saying that the company is well placed for a “cyclical uptick with limited BS-VI risks”, Bank of America Merrill Lynch upgraded Maruti to a ‘Buy’ from neutral and raised target to Rs 8,650 apiece—a potential upside of 18 percent.

Still, most analysts pointed out one gap in the company’s portfolio: lack of a full-fledged SUV pipeline. While Vitara Brezza was a runaway success, the company hasn’t launched a new SUV since Grand Vitara in 2007.

Apart from Mahindra & Mahindra Ltd., MG with its Hector and Jeep with the Compass are looking to tap into Indians' growing preference for roomier, bigger cars.