Investors worry about Guj plant but Maruti up 98% in 16-mth

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Moneycontrol Bureau

Concerns over Maruti setting up the Gujarat plant, has not dampened sentiment for the stock, which has doubled since first making the announcement in May last year. Shares of India's number one car maker hit a record high of Rs 4,762.90 on September 30. This despite bearish comments by brokerages. Jefferies has downgraded the auto major to underperform from buy. The brokerage has also reduced target price by 19 percent to Rs 3952 from Rs 4876 per share. Jefferies feels that changing capital allocation policy will make profits unpredictable for Maruti. Another concern that the brokerage has highlighted is Maruti's reduction of investments in manufacturing, and setting up new distribution network for premium cars. It also says that there is a lack of clarity on arrangement with Suzuki on new plant that will supply cars from FY18. “Near term outlook is very strong but positives in the price,” Jefferies says.So who is the silent friend here?Interest rate reduction, festive season sales bump up and new models launch are attracting investors to the auto major. Maruti remains to be top pick of UBS, stating that there is no risk of capital misallocations but only a difference in timing of cashflow. Maruti disclosed the Contract Manufacturing Agreement (CMA) it is entering into with Suzuki Motor Gujarat (SMG – the Gujarat plant which will be set up by Suzuki Motor Corporation). According to the brokerage, the agreement seems largely in-line with previous term sheet disclosed by Maruti in June 2014. "The CMA indicates that depreciation of plant and machinery will be done at the same rates as used by Maruti for those particular items. This along with the no-profit no-loss arrangement for SMG means that at EBIT level, Maruti's profits should be identical to Maruti setting up the plant on its own," UBS says in a statement.UBS believes the arrangement between both companies  effectively changes upfront capex from Maruti into depreciation payments and so in the long term there is no change in cashflows for Maruti as a result of this arrangement. So, there is no incremental risk of capital misallocation. It adds that in the interim Maruti will also earn some additional interest income on the same as it doesn’t incur upfront capex.Maintaining a target price of Rs 4950, UBS remains positive on Maruti driven by strong new model cycle. It expects strong volume growth in FY17 for Maruti driven by Baleno (premium hatchback) and XA Alpha (compact SUV). Most of the new launches (Ciaz, S-Cross, Baleno and XA Alpha) are positioned above Maruti's existing product range, which should imply strong ASP growth and better gross margins over the next 2 years.  “Suzuki has chosen Maruti as the global production hub for Baleno. As a result, Maruti will also be exporting the car to EU and other developed markets as well. This highlights the growing importance of Maruti in Suzuki's overall vision. We believe the Gujarat plant arrangement should also boost exports for Maruti over the medium term,” UBS adds. CLSA believes that over the next 12-18 months, lending rates will likely reduce by about 150 bps. According to the brokerage, Maruti Suzuki will be one of the key beneficiaries of falling rate environment in its coverage universe. The Reserve Bank of India on September 29 slashed repo rate by 50 basis points to 6.75 percent which paves the way for cut in lending rates going ahead.Antique Stock Broking too is among those bullish on the stock. It has a buy rating on the stock with a target price of Rs 4700. Among PVs, Maruti Suzuki India (MSIL) despatches rose to 113,759 units, up 3.7 percent (YoY) but down 3.5 percent (MoM), led by performance of the compact segment, D'zire Tour and Ciaz.Ashwin Patil, LKP Securities is also positive on Maruti with a target price of Rs 4800 per share stating that sales slowdown is a temporary phenomenon and going ahead export sales are likely to rise. Maruti missed one export shipment of 3500 units which is why there was big export miss in September. Exports during the month declined by 26.6 per cent to 7,676 units as compared to 10,452 units in September last year, MSI said, adding that overseas shipment of around 3,500 units was delayed last month.“With new launches like Ertiga Hybrid and Baleno in October, festive season sales will be strong. Concerns regarding entry into non core areas like premium cars are overdone,” he adds.Follow @NasrinzStory