MARUTI SUZUKI DRIVES FROM ~125 TO ~10,000 IN 14 YEARS

Analysts believe the company still has miles to go in financial performance and stock price

If among the lucky ones who were allotted shares in Maruti Suzuki’s Initial Public Offer of equity, and having held on to these, you would now be sitting on a return of nearly 8,000 per cent.

In 2003, the government divested 25 per cent stake in Maruti Suzuki (then Maruti Udyog) at ~125 a share. The stock debuted on the exchanges on July 9, ending the first trading at ~164, nearly 32 per cent higher than the issue price.

On Wednesday, the share price crossed ~10,000 in intra-day deals on the BSE, though closing the day at ~9,738. It is now the fifth most valued stock by market capitalisation (market-cap) at around ~3 lakh crore – only below Reliance Industries (RIL), Tata Consultancy Services, HDFC Bank and ITC. A recent Motilal Oswal study puts Maruti among the top five wealth creators during 2012-17, pegging the wealth created at ~1.41 lakh crore in this period.

And, if analysts are to be believed, the stock still has miles to go.

Past

Formed in 1981, the government shortlisted Suzuki Motor Corporation as joint venture partner for Maruti. It was in 1983 that the country's first affordable car, the Maruti 800, a 796cc hatchback, was launched; the company went into production in a record 13 months.

Since then, it launched several new models across categories to tap the rising customer demand. Its ability to identify customer need and accordingly launch vehicles, with better technology and at affordable prices, has helped it sustain leadership in the business. Today, with a market share over 50 per cent in the domestic passenger vehicle market, Maruti offers the Alto 800, Alto K10, A-star, Estilo, WagonR, Ritz, Swift, Swift DZire, SX4, Eeco, Grand Vitara, Brezza and Ertiga. Many of these lead in their categories.

“The rise in fortunes of Maruti is a classic example of the consumption boom in India over the years. The company has been able to corner a healthy market share over the years. There is not much competition in sight. Their product mix, plant capacity, sales and marketing network and on-ground presence is unparalleled. All this has augured well for it over the years,” says Gautam Duggad, head of research at Motilal Oswal Securities.

Sales and profits have grown at a fast clip. From ~9,155 crore in 200304, consolidated net sales have grown at a compounded annual rate (CAGR) of 16.7 per cent, shows Capitaline data. Profit after tax (PAT) at ~561 crore has grown to ~7,511 crore, a CAGR of 22 per cent.

Ahead

Despite the high base and a little over $1.1 billion in profit, the company is expected to still clock strong growth in earnings, led by higher volumes. Compared to developed countries, the penetration level of passenger vehicles is low in India; as aspirations and income levels rise, Maruti should benefit. Analysts at Morgan Stanley expect consolidated PAT of ~12,760 crore in 2020 on sales of ~118,224 crore. Maruti’s annual vehicle volumes, according to the global research house, are likely to hit 2.22 million, from the estimated 1.57 mn in FY17.

“The industry has been through a long down-cycle and is showing signs of a turn. In addition, competitive intensity is muted. Maruti should continue to gain share. The stock trades at a one-year forward price to earnings (P/E) of 27.3. While this is more than one standard deviation above the long-mean multiple of 16, we believe the multiples can remain elevated for Maruti, given strong earnings growth,” says a recent Morgan Stanley report.

In a bull case scenario, they expect the stock to hit ~14,400 if domestic volumes rebound quickly, new capacity (in Sanand, Gujarat) ramps up quicker than expected and all new models do well. Volume growth in FY18 is pegged at 15 per cent and 18 per cent in FY19. Their base case target price for the stock is ~10,563 and ~4,950 in a bear market.

Most analysts remain bullish on long-term prospects. “Given the improvement in market share, rising rural contribution, reduced Japanese yen exposure, improving share of premium products, healthy return on equity to capital employed (estimated at 26 per cent in FY19/20) and improving free cash flow, Maruti will continue to trade at a premium,” writes Abhishek Jain, an analyst with HDFC Securities in a recent report.

Japanese parent Suzuki is also taking steps to capture the emerging opportunity in electric vehicles. Maruti should be a key beneficiary.