Maruti Suzuki India - Positive cycle ahead... - Antique

Volumes/Margin catalysts ahead...

An improving macro normally leads to an improvement in consumer sentiment and a consequent uptick in high discretionary spends. That coupled with the fag-end of the rate-tightening cycle, a relatively more stable fuel price environment and clearly some huge pent-up demand should bode well for Maruti volumes going ahead. Entry into relatively untapped segments, coupled with muchneeded refreshments of existing models would enable Maruti to maintain market share, if not improve it.

On the margin side, besides an improving product mix (higher share of nil discount diesel variants/Swift family), the focus on reducing the net import bill (from USD1.7bn currently to USD400m in FY15) will be a positive catalyst for margins. In the interim, an appreciating INR is an icing on the cake. We let this be an upside risk to our estimates.

Well-balanced fuel mix - Cushion in an uncertain fuel price environment

The quantum of this last diesel price increase seems unlikely to impact diesel car demand and/or swing demand towards petrol variants, as the petrol-diesel price differential remains very high. However, given its new-found/long-overdue fiscal obedience, should the government increase diesel prices any further, or if it imposes an additional excise duty on diesel vehicles, any resultant demand diversion from diesel back to petrol vehicles would be neutral (if not positive) for Maruti, given its petrol capacity aplenty.

Peak competitive pressures waded-off...

We have to make our peace with high competition in small cars in India, but the extent of market share loss for Maruti (which has been de-rating catalyst in the past) has been much lesser than earlier anticipated (notwithstanding the impact of the plant lock-out). Maruti has withheld competitive pressures (peak, in our view) extremely well thus far.

Competitor focus shifting from small cars to SUVs, coupled with tepid performance to some of the existing competitor models is another positive. Also, the Ertiga increases Maruti's presence in a fast growing/relatively untapped segment which could offset any probable market share losses in small cars.

Directionally, our favourite stock in the sector... BUY!

Maruti seems to be nearing the first stage of all its positive cycles - volumes, margins and consequently, multiples. Directionally, the stock seems to be one of the best FY14-15 plays in the sector. Reiterate BUY with a target price of INR1,712 (11x FY14e Cash P/E + INR50 for SPIL).

Source : Equity Bulls

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