Moneycontrol
Jul 10, 2013 09:09 AM IST | Source: CNBC-TV18

Expect 10% recovery in Maruti FY15 vol, maintain buy: IIFL

Prayesh Jain of IIFL maintains a buy on Maruti with a target price of Rs 1,750 per share even after the company decided to shut down third shift at its diesel engine plant in Manesar on low demand.


Prayesh Jain of IIFL maintains a buy on Maruti with a target price of Rs 1,750 per share even after the company decided to shut down third shift at its diesel engine plant in Manesar on low demand.


According to him, Maruti will sustain strong growth momentum going forward. He expects Maruti's volume growth to remain muted in FY14, but in FY15 he sees recovery of around 10 percent.


On the Tata Motors' owned Jaguar Land Rover (JLR) UK plant strike, Jain said that there is no major problem reported from there. He says even Tata Motors feels the strike will not impact their production.


Q: How have you reacted to that newsflow about Maruti Suzuki cutting down production to align demand and what would your call be on the stock?


A: This is negative news, especially as most of us were expecting the recovery to happen towards the second half of FY14. Now, with interest cuts also being delayed, we might not see interest rate cuts for sometime. Fuel prices rising and the demand slowdown are likely to extend even in the second half of this year.


Earlier we had estimates of around 5 percent growth for Maruti. Possibly we might cut down that growth to a negative number, somewhere around minus 2 percent or a flattish kind of number. However, the currency benefits are large enough for Maruti to report a pretty strong earning growth even in FY14. That could be a boost to earnings.


In FY15, if the recovery happens we are building it around 10 percent in volumes. If that happens the earnings growth would be anywhere between 15-16 percent given that currency benefits might sustain and also localisation benefits might come in by that time. So, in those terms Maruti earning will see a sustained strong growth and we have maintained our buy rating on the stock with a target price of Rs 1750.


Q: What about Tata Motors, they have a similar problem in terms of a production shutdown but that one possibly because of their strike but what are you factoring in, in terms of the stock?


A: If the strike happens at the Jaguar Land Rover (JLR) plants the supply would be impacted. Currently, we are not factoring in any of these things in our estimates. Media commentary as so far has been that the company will be in a position to offset any impact of that strike.


However, if the strike happens the volumes will be hit at least for a certain degree of period and that will impact the stock price performance as well. The larger concern for Tata Motors is its domestic business where commercial vehicle (CV) cycle is yet to recover. We don’t see that recovery happening even in FY14, utilisation levels is as low as 65-70 percent of the existing fleet. So, the volume recovery in the CV is very bleak and so is their passenger car business. It has been creating new lows every month.


So, in that terms domestic business itself is at a big risk. JLR volumes are also expected to slowdown, given that China is also witnessing some headwinds and the growth is slowing down there in China as well. In that term we are building in 10 percent growth for JLR volumes in FY14 as well as FY15. We are not too gung-ho on the stock and we have a market performer rating.


Q: Have you done this number crunching at all and I don’t even know if it is revenant, we understand that their credit default swaps have gone up as well they could have a huge FX loan exposure. Is there a likelihood of their interest cost jumping because of these reasons now that banks will have to provide for this?


A: Definitely there is a case of interest rates going up and actually the JLR business is a mix of number of currencies and they have exposures in euro, they have exposures in dollars, they have multiple exposures. So, sometimes it becomes difficult mathematics to workout the exact cost but definitely there could be some negative impact on the interest cost in this quarter.


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Q: What about Bajaj Auto, the strike at Chakan now entered its 15th day but the management is sure that 95 percent of the production will be resumed latest by Saturday. What kind of an impact do you see on Bajaj Auto's volumes because of the strike and what would your call be on the stock?


A: In the previous month Bajaj Auto reported that they had lost around 20,000 kind of numbers because of the strike. If that is the kind of impact that is seen it could be certainly very large in this month if the strike sustains because in the previous month the strike was only for a period of three or four days.


If that is the kind of impact then you might see a pretty large impact coming in this month as well. The two wheeler side of the business possibly could see a recovery towards second half of FY14. This assumption is based on the fact that monsoons have been pretty normal.


If monsoons are normal you might see good growth in the tractor demand and that percolates to high agriculture income. That eventually leads to higher rural demand and that could possibly see in two wheeler demand going down the road. However, for Bajaj Auto we need to track exports as well.


Again it will gain substantially on the rupee depreciation and will see strong margins. Bajaj Auto we think most of the upsides have been captured in to the valuations and we have a market performer rating on the stock and we will possibly maintain that.


Q: What about your take on Mahindra and Mahindra (M&M), a slightly broader question if Maruti is giving such a signal about demand decline then would you want to rethink your growth numbers for other stocks and in particular what is your call on M&M?


A: The overall business sentiment is definitely weak. In fact you look at the last year's trend where dieselisation was happening and diesel vehicles were out pacing the petrol variants by a huge margin that trend is also changed in this year. There has been marked slowdown in diesel vehicle demand and that is likely to impact M&M especially if the competition is building up in the utility vehicle (UV) category.


However, we believe that as against 60 percent of vehicles being sold in FY13 were diesel variants we might see that evening out somewhere in the region of 45-50 percent over the medium-term and UV demand is likely to remain strong given the strong acceptance of the UV sector. However, the main trigger for M&M is the tractor demand. The last quarter has been very strong for tractor demand and after being sluggish for last one and a half to two years tractor demand is seeing some signs of revival.


If that sustains that is a very high margin business for M&M and if the recovery sustains you might see a strong profit growth for M&M. Its subsidiary businesses are also doing well so in that terms M&M is still upsides are left and we have a buy rating on the stock with a target price of around Rs 1135.


Q: Do you think advising any fresh buy calls is prudent or would you just advice staying away from the sector given the fact that it is undergoing such a big slowdown?

A: This sector has been in the slow trajectory for sometime now. I definitely would agree with you that it is better to stay on the sidelines rather than invest fresh money straight away. However, if you have to pick certain stocks in the sector for your portfolio then definitely M&M could be one of the top bets.

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