Buy Maruti Suzuki - CMP: Rs.1449, TP: Rs.1715 - Prabhudas Lilladher

Retain Maruti as our Top-pick: Maruti Suzuki's (MSIL's) stock has corrected ~17% in last 1 month mainly on account of technical reasons (stock being removed from the MSCI index) and demand moderating in the diesel segment. The correction, in our view, provides a buying opportunity to longterm investors. In our view, MSIL is the best play on recovery in the macroeconomic situation. Given the strong product portfolio of 'Swift', 'Dzire' and the success of 'Ertiga', we maintain our long-term positive view on the stock and expect a strong recovery in FY15E (volume growth of 13.8%).

Timely capacity expansion & uptick in the Petrol car market: Manesar has ramped up to full production of 1,900 cars/day. At the same time, MSIL is expanding its diesel engine capacity by 20% to 4.8lac units in FY14E. Given the strong demand for 'Swift' and the 'Dzire', the timely ramp-up will help MSIL to improve its market share. The new 800cc 'Alto' has received a booking of ~30,000 units in the first month of its launch. Some dealers are already indicating an uptick in petrol car sales. Given that petrol still accounts for ~60% of MSIL's product portfolio, this trend is likely to benefit the company.

Favourable currency impact on imports yet to come: MSIL's JPY denominated imported content (direct + indirect) stands at ~19% of net sales. With JPY depreciating against USD and INR being relatively stable against USD, MSIL is likely to benefit on the imported content of raw material. MSIL has already hedged its direct exposure (~8% of net sales) till March'13. However, they are likely to gain on the indirect imports front from Q4FY13 onwards. For FY14, we have assumed a cross-currency rate of INR/JPY at 0.61 v/s 0.66 in FY13. As a result, we estimate 60bps improvement in material cost/sales ratio in FY14E.

Reiterate our positive stance on MSIL: We have assumed a 10.3% and 13.8% volume growth in FY14E and FY15E, respectively. We expect the margins to improve by ~180bps over the next two years, mainly on account of currency hedging, operating leverage and better product mix. We maintain MSIL as our top-pick in Auto space with a TP of Rs1,715 based on 14.0x FY15 EPS (MSIL +SPIL) of Rs122.

Source : Equity Bulls

Keywords