Case Study

Maruti Suzuki Stock: Rating-Overweight

By HSBC Global Research

Competition overhang should be over: Maruti Suzuki has underperformed the Sensex (^BSESN : 18167.03 +93.13) by 18% in the last three months over concerns of competition affecting its sales and margins. We believe the weakness in the stock price sets an attractive entry point, given that: (a) the wave of the new launches from competition is almost over while Maruti Suzuki is going to launch CNG variants in H2FY11e; (b) the company has started to regain the marketshare. In fact, marketshare loss has been higher for Hyundai and Tata Motors (TATAMOTORS.BO : 1024 +17.35); (c) demand at the ground level remains strong and the new launches have grown the market; (d) premium hatchbacks are cannibalising sales of sedans; and (e) competitors, namely, Ford has started to contemplate price hikes, thus, allaying the fear of a price war.

Marketshare gains, price hikes in Q2, strong monthly sales volume, Q2 earnings and the launch of CNG products in Q3 are likely to be positive catalysts for the company. We are 8% above consensus on FY11 earnings of Rs 105.

OW(V) with 28% upside: We retain our OW(V) rating and DCF (discounted cash flow) based TP (target price) of Rs 1,660. We have assumed the cost of equity to be 13.5% and have explicit estimates until FY12. In our semi-explicit forecast period of ten years, starting from FY13, we assume a 13.5% NOPLAT CAGR (net operating profit less adjusted taxes-compound annual growth rate) . At the current price, the stock is trading at a 12.4x FY11 PE (price-to-earnings) multiple, which we expect to expand to 14x (long-term average) in FY12 as the company surprises on volumes, pricing and earnings. Downside risks include a higher-than-expected increase in interest rates and input costs, adverse currency movements and stiffer-than-expected competition.

Maruti Suzuki has long-term strategic advantages over competition. No one understands Indian carbuyers' psyche better...