Strong launch pipeline to boost Maruti sales: Antique

Antique Stock Broking has upgraded Maruti Suzuki’s 12 month target price to Rs 4340 per share on back of strong launch pipeline in the next two years. The company is all set to launch diesel version of Celerio.According Basudeb Banerjee, AVP Research of Antique currently all the things are in place for Maruti. Over the years it has become a well diversified player and no longer remains a lower-end hatchback player, he adds. The Swift hatchback, Swift Dzire from the sedan segment and the recently launched Ciaz have driven volumes for Maruti.

Also read: Maruti Suzuki December sales rise 20.8% to 1.09 lakh unitsSome of the prime drivers for Maruti’s improving sales have been falling crude prices and favourable yen cushioning its margins, says Banerjee.Banerjee is also upbeat on some other auto players like Ashok Leyland, Tata Motors and Eicher on back of recovery in the commercial vehicle segment. The house has a buy on all three. However, the top pick remains Ashok Leyland with a target price of Rs 80 per share.From the auto component space he is upbeat on Bosch.

CLSA too on Monday retained Maruti as one of its top auto picks for 2015 with a target price of Rs 4400. According to the house Maruti offers a confluence of multiple macro and company-specific positives over FY16-17 and multiple new products in ‘white spaces’ have the potential to boost its market share higher.

Below is the transcript of Basudeb Banerjee's interview with CNBC-TV18's Sonia Shenoy and Senthil Chengalvarayan.Sonia: Maruti seems to be a consensus buy now because of the multiple positive triggers that the company has. Would you be as bullish as what CLSA has projected – Rs 4400 target price and what would your 12 months outlook be both on the price as well as on the earnings for Maruti?A: Actually, we upgraded our target price of Maruti last month rolling over to FY17 earnings and our target price is Rs 4350, tad lower than the target price of the other house which you just mentioned. I am not surprised per se with that kind of target price for Maruti. We have earnings per share (EPS) estimate of close to Rs 220 for FY17.I will say prime triggers for Maruti presently are the falling crude prices, which is helping the users to reduce their cost of operating the vehicle. Secondly, if you see the yen movement all the way to 120 plus, even if the trend of discounts per vehicle is moving up gradually this favourable yen is allowing Maruti to cushion its margins against these kind of adversities. So, combining these two things and definitely the kind of launch pipeline Maruti Suzuki has in coming 24 months is excellent. Already they have launched Ciaz in the segment where they were almost absent. Next in the pipeline will be the Celerio diesel version. That will be the first of its kind diesel hatchback on the lower end of the market by Maruti following the success of Celerio's AMT version. Definitely this will be a model to watch out for.Then the SX4 Crossover and the XA Alpha in the LCV. So, if you look at last 4-5 years volume of Maruti the mini segment which is the Alto, WagonR, A-Star the volumes have contracted and in due course of time the volume increase of Maruti has come through hatchback segment of Swift, the sedan segment of Dzire and the UV segment of Ertiga and now Ciaz. So, broadly the volume value mix of Maruti is improving. No longer is it just a lower end hatchback play. So, going forward with UVs coming into portfolio it is a well diversified player. All these yen currency movements are temporary drivers of the margin. So, definitely things are all in place for Maruti after all the troubles like labour troubles or adverse fuel prices or adverse interest rates that Maruti faced.Sonia: For an average Maruti investor the only niggling worry is what happened earlier where it ran into trouble with its institutional investors over the transfer of the Gujarat plant to the parent Suzuki. Now Maruti has deferred seeking the shareholder nod for that Gujarat plant. Would that worry you at all?A: I refrain myself commenting on those legal and compliance related aspects for Maruti. I will say that if you look at the timeline, when the Gujarat plant will get operational and become a substantial part of the overall product mix I will say it is at least 3-4 years from now. If the Manesar and Gurgaon facilities are good enough to take care of growth for the next 3-4 years. The new launches, the diesel portfolio there is enough of capacity to take care of growth for next 3 years. So, those kind of concerns come and go, people tend to forget, people tend to highlight but I will say at least the drivers of the current business are pretty much intact and that is driving the market cap. It has already moved up by close to 70-80 percent post this Gujarat issue came up at around Rs 2000 share price and now it is at Rs 3400. So, things will come and go but I will say once should focus more on the operational side.Senthil: We just had Andrew Holland of Ambit tell us that he would rather play this entire auto theme. He did not talk stock specific but through the component manufacturer because he feels that is where the money will be made this year. Would you agree or would you go with largecaps like Maruti Suzuki?A: Component manufacturers definitely are there but one should focus on the business model of component manufacturers. I will say there are three kind of component manufacturers - one where irrespective of the demand side the dependants on the commodity movements is very high. For example battery makers or tyre makers will be depending on currency movement, the lead price movement or natural rubber price movement. So, they have their own vagaries other than the economic cycle and the car demand cycle.On the other side there are few business models where entry barrier is pretty low so it is more of a volume play and whenever the demands pick up significantly the earnings moves up and vice-a-versa. So entry barrier where it is high there is not much dependency on commodity so the players like Bosch, WABCO or SKF Bearing they perennially get respect from the market. We are very much positive on Bosch even at current juncture looking at demand revival prospects both in the passenger vehicle and the commercial vehicle (CV) industry. Sonia: While Maruti has been in the limelight today, the star of the day clearly is Ashok Leyland, up almost 8 percent and huge volumes traded there. You were talking about the CV recovery. How would you play it would you buy Ashok Leyland now after the huge run up or would you play some stocks like Eicher Motors, even Tata Motors commercial vehicle segment is recovering? What are the stocks that you would pick up to play this theme?A: If you remember we came out with a CV sector thematic last month itself where our top pick was Ashok Leyland with a price target of Rs 80. I will say Leyland is well poised with all the drivers of earnings in place. Especially on the backdrop of the qualified institutional placement (QIP) they have recently done operating at just 50-55 percent of capacity utilisation so there is enough of operating leverage remaining. Net-net equity close to 1, so when you have free cash flow positive there is enough scope of repayment of debt and reducing your interest out go. The biggest aspect is irrational discounts prevailing in the CV market and that is not sustainable in the longer run. So, the moment the CV cycle recovers there will be a rationalisation of the discounts. So these three factors combinedly will take the free cash flow of Leyland up significantly and that is a prime driver of market cap. The stock has done pretty well over last six months even after QIP and we are positive with a price target of Rs 80 on Ashok Leland.Regarding Tata Motors and Eicher they are not primarily in India CV centric place. One is a Royal Enfield centric play and another is a Jaguar Land Rover (JLR) centric play. The impact on the market cap of a domestic CV recovery won’t be that significant. Disclosures: We are a sell side brokers so we are positive on all the three stock on Ashok Leyland, Tata Motors and Eicher Motors and we have buy rating on the three.