Maruti Suzuki - Attractively valued - Ambit

We continue to expect a volume recovery in the passenger vehicle industry in 2HFY14 (industry growth rate of 4% YoY in FY14 vs. 2% YoY growth in FY13). Whilst a good monsoon may aid demand growth in the rural areas, which now account for nearly 29-30% of Maruti Suzuki's domestic volumes, the festive season in 2HFY14 would likely be the key catalyst for revival of demand in the urban markets. We expect Maruti to retain its market leadership position (with a market share of 39.7% in FY14 vs. 39.1% in FY13 and 40.4% in 1QFY14 in the domestic passenger vehicle industry), owing to a sustained competitive edge around brand, cost of ownership and distribution, and dominance in the higher-growth rural markets. As a result, we expect Maruti to clock a domestic volume growth of 5% in FY14.

Whilst the commencement and in fact the rising trend of discounting in the diesel car segment is a cause for concern, we have already brought down our EBITDA margin estimate for FY14 to 11.5% and FY15 to 11.6% to reflect this trend. Overall, we expect Maruti's EPS to record a CAGR of 19% over FY13-15E.

The stock currently trades at 14.3x FY14 consensus net earnings, at a discount of 5% to the historical average which looks attractive given: (a) the strong franchise (market leader in the passenger vehicle space); (b) strong balance sheet with net cash of around Rs77bn as at end-FY13 (18% of current market capitalisation); and (c) consensus expectation of earnings growth of 20% in FY15.

Source : Equity Bulls

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