Maruti an outlier amid falling volumes

Last Updated: Fri, Sep 27, 2013 05:12 hrs

The Maruti Suzuki stock is up a little over 12 per cent in September, on hope of a turnaround in volumes in the coming festival season, steady performance in the rural segment and reasonable valuations.

The company is struggling to cope with the demand slowdown (mainly urban). It saw domestic volumes for the April to August period grow three per cent year-on-year, albeit on a low base. While overall growth has been muted, rural sales (30 per cent of volumes) are growing at a healthy pace. Binay Singh and Yashesh Mukhi of Morgan Stanley say sales volume in the rural segment is up 20 per cent year-on-year for the financial year till date, as against three per cent overall growth for the company, though interest rates are higher in rural areas.

While rural sales are holding up, the company is banking on the festival season and new launches such as the WagonR Stingray to improve sales numbers. While Maruti has a number of advantages, given its wide portfolio and reach over its competition, and could benefit from a demand revival, the poor sales performance in the year so far is reflecting in the share price. This is down 20 per cent since its May high of Rs 1,750. However, for FY14, analysts expect Maruti to report a one to three per cent growth in volumes, versus a marginal fall for the industry. Better growth and reasonable valuations are a good opportunity to consider the stock.

CIMB analysts Pramod Amthe and Kunal Jhaveri believe the Street has already factored in the worst. The key catalysts, they say, are favourable price/book valuations and festival demand revival. The stock is trading at 1.6 times its estimated FY15 book value (six-year range is 2.5 times) and 10 times its price to earnings (PE) estimate.

Rural edge
With monsoon rainfall above normal and the increasing presence of Indian companies in rural areas, Deutsche Bank analysts believe these will have a multiplier impact on the economy. In a report on rural demand, Deutsche's Abhay Laijawala and Abhishek Saraf say with urban India seeing muted growth on rising interest rates and high inflation, investors must focus on companies which have invested in building a presence in rural India.

Maruti is one of their rural picks; they say it should be a key beneficiary in the sector. In fact, Maruti's presence in rural areas and its entry-level product portfolio had helped it to raise contribution from rural areas to domestic volumes from four per cent in 2007-08 to 28 per cent in 2012-13. It is enhancing the distribution reach, by more than doubling its presence from 45,000 villages last year to about 100,000 this year.

Strongholds perform
As has been observed with two-wheelers, consumers tend to stick with trusted brands and downtrend to lower-cost vehicles during a slowdown. Unlike the newer models of the company such as the Ertiga and Ritz, pegged back by competition, its year-to-date sales growth is largely coming from the Dzire, WagonR and Alto.

Say Morgan Stanley analysts, "Faced with economic headwinds, the consumer is turning risk-averse and returning to legacy brands, helping companies such as Maruti Suzuki gain market share." The firm cites the Swift Dzire, which saw its market share grow to 20.4 per cent in the April-July period from 17.3 per cent in FY13, as sales growth outpaced segment growth. Export sales, down in April-June, have picked up in the past two months. The management expects sales to stay at levels seen in 2012-13, compared to the 15 per cent decline in the first five months of FY14.

Festive sales key
While Maruti's strengths continue to be its product portfolio and distribution network, it faces some headwinds. Its share of the more profitable diesel variants of its products (Dzire, Ertiga and Swift) is coming down. From a high of 36 per cent in FY13, the diesel vehicle proportion of overall sales volume is likely to shrink to 31 per cent in the September quarter, feel CIMB analysts, as higher diesel prices have led to a fall in diesel vehicle demand. Second, while average discounts were up by Rs 13,400 per vehicle in the June quarter, analysts estimate these would rise 20-30 per cent in the September quarter. The poorer product mix and the currency impact are likely to put pressure on margins by 100 basis points in the near term.

An optimising product mix, localisation of import content and a price rise of Rs 10,000 on an average across models (announced this week) should provide a cushion. While the company has readied a new small car to be launched in the March 2014 quarter and a crossover in FY15, which should support volume growth, the coming festive season is crucial, as a third of sales are done in this period.

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