ICICI Direct’s research report on Maruti Suzuki India
The demand situation in the domestic auto space has got aggravated post the recent muted festive season (Dussehra, Diwali 2018) with inventory levels in the system showing no signs of abatement. Consumer sentiment is muted primarily tracking higher penetration of connected mobility (ride sharing), higher insurance costs incidence, etc. As per recent FADA release, total passenger vehicles retail sales domestically are down 8.25% YoY in February 2019 with inventory in this segment at 50-60 days vs. the normal range of ~30 days. This will warrant less production at OEM level to stabilise channel inventory leading to de-growth in dispatches in March 2019. Moreover, Q1FY19 was a very high growth period for the industry given the transitory phase in the base quarter (Q1FY18) before GST implementation. This will eventually result in nearly no growth for next four months and test inventor patience. The management commentary also suggests muted sentiments with demand recovery seen only post Union elections. Empirically, it has been observed that one year forward P/E multiples expand (>20x) at Maruti Suzuki India (MSIL) whenever their volume growth is >=10% and contract towards its mean i.e. ~20x whenever volume growth is <10%.
Hence, with volume growth expectation of mere ~3% in FY19E & ~7% in FY20E, we expect valuation multiples to contract towards its mean. Conservatively, we value Maruti at Rs 6,000 i.e. 22x P/E on FY20E EPS of Rs 272.6 and downgrade the stock to SELL. On the valuations front, the risk reward is adverse at the moment.
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First Published on Mar 25, 2019 05:25 pm