BackMaruti Suzuki gains as passenger vehicle sales sizzle
Maruti's shares have raced past all indices, with one-year returns almost double that of the BSE Auto index
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Shares of Maruti Suzuki India Ltd climbed 4.7% on Monday in response to a huge outperformance in sales volume. It sold 27% more cars in August, both in the domestic and overseas markets, backed by improvement across all segments. For the five months ended August, sales were 17% higher than a year ago.
One could argue that the robust growth comes after a slide in passenger vehicle sales in 2013-14. Yet, it is good news from a shareholder perspective as the rise in sales of other car makers like Hyundai, Honda and Nissan only reinforce the return of strong growth in the passenger vehicle segment.
Within this segment, Maruti Suzuki would be the biggest beneficiary as it bites off nearly half the market share. Another favourable trend is the gradual decline in petrol prices (6% in one year) and the increase in diesel prices (12% in one year). Again, this augurs well for Maruti Suzuki as 65% of its cars are petrol-driven. “Higher petrol car sales improve capacity utilization and operating leverage for the company aiding profitability," says Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd.
Some analysts also say component imports are higher for diesel cars, which affects profit margins. Data from Emkay Global Financial Services Ltd shows that Maruti Suzuki’s diesel car sales were on the ebb since 2013-14, when its share in total volumes fell to 32.5% from 38% in the previous year. With petrol prices dipping, sales growth in the compact segment will continue even with interest rates holding firm. The festive season may help lower discounts, too.
Meanwhile, Maruti Suzuki’s drive to procure more components locally rather than through imports will buoy profit margins. The key to earnings growth is therefore sales volume (See Maruti’s earnings prospects hinge on sales momentum)
In the last one year, Maruti Suzuki’s shares have raced past all indices, with one-year returns almost double that of the S&P BSE Auto index. At the current price of ₹ 2,916, the stock trades at 19 times estimated earnings per share for 2015-16, which takes all positives into account. Triggers for further gains could come if the company continues to beat sales expectations every month and if interest rates soften.
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