• MARCH 24, 2004

Maruti: Will good times continue to roll?

Notwithstanding the profit booking in the last few days, Maruti, the country's largest automaker, has witnessed a significant appreciation in its stock price in the last one-year or so. And this appreciation is not without reason. FY04 has turned out to be a very good year for the auto industry.

Higher GDP growth and availability of affordable financing schemes has helped the passenger car industry to register a robust growth rate of 24% during 9mFY04 on a YoY basis. The fact that the demand had slowed down considerably during the past three years also helped boost the growth further, as it led to a substantial pent up demand, which materialized in the current year. Maruti has kept pace with the rise in demand. Infact, the company's sales during the same period have registered a marginal increase over the industry growth rate, thus improving its market share to 55% during 9mFY04 (54%, a year ago).

With segment 'A' and segment 'B' accounting for 84% of the industry volumes in FY03, the company's monopoly in the former and dominant market share in the latter has helped Maruti outperform the industry in 9mFY04. While the company's declining market share in the latter does raise some doubts, it has to be remembered that it is a competitive market and overall share will go down further. However, Maruti has a strong portfolio and the expertise of Suzuki in the small-car segment (it is a market leader in the small car segment in Japan), which is a positive.

Besides, a strong sales and distribution network in the country (178 authorised dealers and 243 sales outlets covering nearly 161 cities) also provides an edge over competition. This is a good competitive advantage for and it will take some time before rivals like Tata Motors and Hyundai catch up with the company in this regard.

On the growth in demand front, we expect the passenger car business to grow at a CAGR of 10% in the next three years on account of a host of favorable factors such as increasing affluence of the Indian middle class, ever improving road infrastructure and availability of affordable finance schemes. However, on account of intense competition, the realisations are likely to come under pressure. Though we expect the company to increase margins to around 8% levels, further rise is likely to be limited.

The stock is currently trading at Rs 449 implying a P/E of 19.2x our FY05 earnings estimates. While the growth in the current year has been very good, we believe that such a growth is not sustainable going forward and is likely to stabilize at around the 10% mark from a three-year perspective. Besides, when we look at one of the more efficient car manufacturers in the world, Nissan, the stock trades at 12 times earnings with an operating margin of 12% and a RONW of 27%. Though we expect Maruti to improve margins and net profit margin, the valuations appear to be stretched.

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