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Jul 09, 2013, 04.08 PM 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.

If the recovery happens the earnings growth would be anywhere between 15-16 percent given that currency benefits might sustain and localisation benefits might come in

Prayesh Jain

Oil & Gas Analyst

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 .

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.

Maruti Suzuki stock price

On October 30, 2014, Maruti Suzuki India closed at Rs 3242.15, up Rs 36.70, or 1.14 percent. The 52-week high of the share was Rs 3297.00 and the 52-week low was Rs 1541.25.


The company's trailing 12-month (TTM) EPS was at Rs 96.45 per share as per the quarter ended September 2014. The stock's price-to-earnings (P/E) ratio was 33.61. The latest book value of the company is Rs 694.45 per share. At current value, the price-to-book value of the company is 4.67.

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