Maruti may near ~10,000 level in 2018: Nomura

After a stellar 60 per cent rally thus in calendar year 2017 and outperforming the S&P BSE Sensex and S&P BSE Auto indices that rose 26 per cent and 25 per cent during this period, can Maruti Suzuki hit the five-figure mark over the next one year? Analysts at Nomura believe the stock, already trading near its 52-week high levels on the NSE, can come close to hitting this figure, if not breach it.

In Nomura’s latest report on the outlook for global auto firms for 2018, Maruti Suzuki, with a price target of ~9,843 (17 per cent upside from current levels), features among the top regional picks for 2018, along with China’s BYD and the US-headquartered Tesla. Toyota is their preferred global pick.

“Strong demand for new models, benefits from market trend towards premiumisation, and healthy cash flow generation are key positives that make Maruti Suzuki our top pick in the Indian auto sector,” writes Kapil Singh, an analyst at Nomura tracking the sector in a co-authored report.

India’s passenger vehicle market is in the midst of a structural growth cycle and is likely to see a 12-14 per cent compounded annual growth rate (CAGR) over the next 5-10 years, Nomura says, underpinned by 6-7 per cent annual growth in GDP. With a pick-up in growth (Nomura pegs GDP growth at 7.6 per cent by 2019), new vehicle sales could grow at a CAGR of 12-14 per cent over the next few years.

For the two-wheeler segment, Nomura expects growth to stay around 10 per cent CAGR over the next 5-10 years, given higher ownership levels. But, scooter growth could be much stronger at around 15-20 per cent driven by rural preferences and a growing number of working women. Medium and heavy commercial vehicle growth is likely to remain strong (15 per cent year-on-year in FY19/3F) due to the enforcement of overloading restrictions and improving industrial activity, Nomura believes.

“Vehicle ownership in India, estimated by us at 28 per 1,000 at the end of FY17/3, is near an inflection point, similar to that seen in markets such as China, South Korea, and Japan in the past. Rapid growth in vehicle ownership in these countries was supported by 8 per cent growth in GDP, close to what we are seeing in India now,” Singh writes.

Maruti recently announced its intention to introduce electric vehicles (EVs) in India by 2020, with technical support from Toyota. Nomura believes the shift to EVs will be more pronounced in the commercial vehicle segment over the medium term, while wider public acceptance is still some time away.

“The company has proved everybody wrong by retaining market share over the last few years. They were also able to manage the currency risk (yen) effectively. Capacity expansion augurs well for Maruti in the long run as it will add to the bottom line without burning too much cash. I do think the stock can hit ~10,000-levels over the next couple of years,” says G Chokkalingam, founder and managing director, Equinomics Research.