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Apr 30, 2018 11:29 AM IST | Source: Moneycontrol.com

Bullish on Maruti Suzuki for long term: Akash Jain

"We are bullish on Maruti Suzuki for long term. The company will be a wealth creator for investors who hold it for a horizon of 5-10 years," says Akash Jain, Vice-president, Equity Research at Ajcon Global Services.

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Akash Jain

We are bullish on Maruti Suzuki for long term. After the crisis in its Manesar plant few years back, when street participants were bearish on the company, the stock has seen a massive a rally over the last 5 years and proved that it is a force to reckon with in Indian automobile industry.

At current market price, the valuations look bit stretched. The company currently trades at 31x times FY19 and 28x times FY20 projected earnings by street participants.

However, we believe with the introduction of luxury vehicles, gaining market share consistently, guidance on volume growth which is above industry growth rate, the company will be a wealth creator for investors who hold it for a horizon of 5-10 years.

In Q4FY18, the company witnessed growth of 15 percent on YoY basis in its standalone revenue to touch Rs 21,166 crores which was in line with street expectations. The growth was led by volume growth of 11 percent and realization growth of 4 percent on YoY basis.

QFY18 EBITDA registered growth of 18 percent on YoY basis to touch Rs 3,015 crpre. EBITDA margin improved by 28 bps YoY to 14.2 percent. The company could expand its OPMs owing to gradual decline in the average discount per vehicle which dropped to Rs 13,880 in Q4FY1 from Rs 17,900 in the previous quarter.

Better product mix and lower (or nil) discount for its latest launches helped it to offset rising commodity prices. The continous decline in the average discount level suggests impoving consumer sentiments and lower push sales. In addition, better margins on Vitara Breeza due to lower tool and die expenses resulted in a 50bps positive contribution to gross margins. In line with its strategy to cater to the premium segment, the management is expanding its Nexa network.

It currently has around 250-300 Nexa outlets and plans to expand it to 400 by 2020. On the back of a strong product portfolio and distribution network, the company has been able to grow its market share despite the entry of multiple global players. The new Swift and Swift Dzire have received very strong traction from customers. The management has a track record of more success in its new launches than failures over the last four years.

Standalone PAT clocked 10 percent growth on YoU basis to touch Rs 1,882 crore which was below street participants expectation owing to rise interest expenses (which jumped nearly 12 times YoY). Tax rate also came in 345bps yoy higher at 28.6 percent.

During Q4FY18, Maruti cleared dues pending to the Haryana State Industrial & Infrastructure Development Corporation Limited (HSIIDC). Accordingly, it paid the entire sum in one go during the quarter, amounting to Rs 923.4 crore. The company has guided for double – digit volume growth in FY19, compared with 8-9 percent for the industry.

It sold 17.79 lakh vehicles in FY18, a gain of 13 percent on YoY basis. Based on the volume growth guidance, we believe Maruti expects further market share gains. The company's Capex incurred a Capex of Rs 3,400 crore in FY18 and gave guidance for FY19 of Rs 5,000 crore. Out of this, Rs 4,000 crore will be spent on core activities such as new product development, maintenance and capacity expansion. The remaining Rs 1,000 crore will be spent on land acquisition.

Production from Gujarat was 1,57,000 units in FY18 and will be 2,50,000 units in FY19. Second line in Gujarat will commence production from January 2019. Production from Phase I of the Gujarat plant has begun. The plant is expected to produce 250,000 units this year. Phase II would start from January next year. The management expects to expand capacity of this plant to 1.5 million units.

We believe factors such as higher utilisation levels at Gujarat plant, softening discount level and lower royalty payment will augur well for the Company. The concern of rising raw material cost would be compensated by the above factors.

With regards to therat of electric vehicles, the company has announced an investment of Rs 1,200 crore for setting up a Li-ion manufacturing unit in India. As per the management, the indigenous development of the battery could substantially bring down prices of EVs.

Disclaimer: The author is Vice-president, Equity Research at Ajcon Global Services. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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