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Motilal Oswal has advised buying Maruti Suzuki, with a target price of Rs 7,443 (implying 25 percent upside), citing growth through capacity addition in Gujarat.
The brokerage house says Gujarat plant would add around 13 percent to total Maruti Suzuki capacity in FY18 and contribute around 23 percent by FY20. The Gujarat plant is expected to ease capacity constraints and help to drastically reduce waiting periods for products like Baleno, Brezza and Ignis, it adds.
The research firm feels Gujarat plant would have superior profitability on full ramp-up as the plant offers several advantages including land at concessional price, sales tax benefit, centrally located, stable industrial environment, good power connectivity, excellent infrastructure, lower wage cost, better efficiency (higher automation than average at Maruti plant, but similar to line-3 added at Manesar in FY14) etc.
Suzuki Motor Corporation's subsidiary Suzuki Motor Gujarat has started first phase of Gujarat plant with initial capacity of 0.25 million units and investments of around Rs 3,000 crore.
The volume for Gujarat plant in FY18 is estimated at 0.15 million units, with utilization at around 40 percent in first half of FY18 but ramping up to almost 100 percent by Q4FY18. Suzuki plans to expand the Gujarat plant, with further 0.25 million capacity addition by Q4FY19, along with engine plant, the brokerage house says.
Maruti Suzuki would be sourcing 100 percent of production of Suzuki Motor Gujarat and supplies to Maruti would be on cost to cost basis.
Motilal Oswal believes there could be a transitory impact on Maruti's margins in the next few quarters due to negative operating leverage on gradual ramp-up of the Gujarat plant, inward freight on components sourced from Haryana plant and higher depreciation rate.
Also, Q4FY17 would see non-recurring pre-operative costs (estimated impact of around Rs 150 crore or around 80bp in Q4FY17), it says. It expects impact on reported EBIT margins by 40bp in FY18 (implying 80-100bp impact in 1HFY18), but expects no material impact in FY19 as almost 50 percent of vendors is likely to have Gujarat presence by FY19.
Meanwhile, on April 1, the company said it sold 1.39 lakh units in March, a growth of around 8 percent over a year-ago period. Motilal Oswal says these sales figures were lower than its estimates of 1.43 lakh units.
At 11:57 hours IST, the stock was quoting at Rs 6,044.60, up Rs 20.30, or 0.34 percent on the BSE.
Posted by Sunil Shankar Matkar
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