Maruti Q2: A steady show from the leader, but valuation leaves no room for comfort
Albeit our high comfort on the business, the valuation leaves little room for comfort and we would advise investors to capitalize on dips to build position in the stock.
Nitin Agrawal
Moneycontrol Research
With all regulatory headwinds waning, Maruti Suzuki India (MSIL), the country’s top car maker with a market share of close to 51 percent, continues to keep its mojo on. Today, MSIL has a virtual monopoly in passenger vehicle market in India led by strong dealership network, brand loyalty on the back of competitive prices and resale value.
With a slew of new launches including refreshers, strong order pipeline, product rejig toward premium products and leadership position in Indian market, the stock will continue to enjoy the fancy of investors despite the premium valuation.
Strong volume and ASP growthMSIL posted a strong volume growth of 17.6 percent (YoY) on the back of restocking after GST and festive demand. The growth in volumes was led by Brezza, a compact SUV and Baleno, a premium hatchback.
Utility vehicles (UV) witnessed a significant 27.6 percent growth (YoY), followed by passenger vehicles, 19.2 percent (YoY). UVs now contribute close to 15 percent of total domestic sales.
Net operating revenues registered a growth of 21.8 percent on the back of growth in volume and average realization (3.6 percent YoY). The increase in net realization was attributed to the expanding premium products in the portfolio.
Stable EBITDA margin - Raw material prices got offset by cost efficienciesMSIL posted a minor blip of 10bps (YoY) in EBITDA margin, mainly on account of an increase in the raw material price of close to 110bps (YoY), which partially was offset by cost reduction measures undertaken by the company. The management, however, mentioned that the raw material cost is expected to go up in the second half of the year, which might hurt margin.
Is it a stock to own for the long-haul?
Premiumisation trend continuesMSIL has been able to identify customer preference patterns and has worked accordingly. The company has successfully reoriented its product portfolio dominated by small cars to premium products, which cater to the changing customer preference.Strong distribution network – a moat
MSIL’s leadership is indicated by its strong distribution network. This distribution network is a moat to the company, which gives it an advantage in an otherwise highly competitive industry. Moreover, in the strong quest to cater to the premium segment, the company is expanding its Nexa network. It currently has around 250 Nexa outlets and plans to expand it to 400 by 2020.
On the back of product portfolio and strong distribution network, MSIL has been able to grow its market share despite the entry of multiple global players.
Strong product pipelineMSIL has planned a slew of launches over the next three years. MSIL has a track record of more successes than failures over the last three years. Except for the S-Cross, all other launches from FY12 till FY17 witnessed strong customer demand.Getting ready for EV
The company is gearing itself up for the next big disruption of electric vehicles (EV) in the automobile space. Recently, it announced its decision to invest Rs 1,200 crore in the setting up of a lithium-ion manufacturing unit in India. As per the management, the indigenous development of the battery could bring the prices of EVs down substantially.Capacity expansion
MSIL has a huge order backlog, indicating strong demand from customers and need for capacity expansion. The company has clearly chalked out a capacity expansion plan. The Gujarat plant has already started production and is expected to produce 150,000 units this year and the management expects to expand the capacity of this plant to 1.5 million.Valuation leaves little room for comfortMSIL, currently, trades at 31.4 times FY18 and 28.3 times FY19 projected earnings. Albeit our high comfort on the business, the valuation leaves little room for comfort and we would advise investors to capitalize on dips to build position in the stock.
