But 4700-4800 might be proved as strong supply zone;
Expect 5000-5400 only sustaining above 4860
Possible effect of 7-th Pay Comm may be already discounted to a great extent
By the recent surge in the stock prices;
Pay Comm's proposal may poses some fiscal headwinds too for overall Indian economy !!
CMP: 4650
Sell on rise around: 4750-4800
TGT: 4590-4500*-4440-4314* (1-2M)
TGT:4000-3900 (3M)
TSL>4860
Note: Consecutive closing above 4860 for any reason, Maruti may scale up to 4950-5045-5125 & 5235-5400 in the short to medium term and in that alternative scenario, Sell position may be reversed to take advantage of the upside with 4750-4690 as TSL.
Q2FY16 result of Maruti was in line with street estimates. Q2 PAT was at around Rs.1226 cr against consensus of around Rs.1240 cr (YOY-863 & QOQ-1193).
Q2 EPS was at 40.57 against estimate of 42.23 (YOY-28.55 & QOQ-39.49).
The 42% jump in Q2 PAT (YOY) was attributed to higher volumes, material cost reduction initiatives, lower commodity prices and favourable FX (relatively lower Yen due to BOJ QQE & strong USD).
As a result, with 13% increase in sales volume, Q2 EBITDA grown by almost 49% and OM expanded by around 3.9% (YOY).
Thus the overall result was helped by better operating leverages, lower commodity prices and also by lower finance cost (down by 49%), but capped by higher tax expenses (up by almost 127%) and lower other income (down by around 25%) to some extent.
As par management, royalty payment to its parent Suzuki may also be reduced from present rate of around 6% to below 5% on net sales in the next 4-5 years, which will boost the OM of Maruti (because of higher localization). Going forward, Maruti will also royalty for new models in INR rather then Yen (for old models), which will safeguard it from currency volatility/headwinds.
Maruti is also seeking minority share holder's nod (votes) for the contentious issue of proposed Suzuki plant in Gujrat for production of vehicles and sell the same to it (Maruti) at cost prices !! The investors has a concern that Suzuki may sale the cars to Maruti at higher prices than it would have cost Maruti to produce them. Analysts are expecting cost savings of Maruti and deployment of its huge cash to other areas, like marketing, R&D etc and a net price effect of around 385/- per share (NPV) due to this contract manufacturing. This may also help in the likely production capacity constraint of Maruti by FY:17.
Apart from recent successful launches of hatchback Baleno & S-Cross, Maruti will also launch a SUV (Ignis) in Q4FY16. Its also planning to enter big in LCV market with its "fuel efficient" theme and separate dedicated distribution/service network to compete with market leaders like Tata Motors & M&M. Thus various new launches in PV & LCV will help it to grow incrementally higher in the coming quarters.
Maruti may be also the biggest beneficiary of 7-th Pay Comm's Recco as it commands around 48% of domestic PV market and various Govt departments has tie up with it. It may also be benefited immensely with the expected demand recovery in India as it has stronghold in the the entry level automobile market, where the slow down affected the most.
Analysts are expecting that due to versatile automobile portfolio, Maruti is expected to retain its market share, driven by 17% CAGR in volumes along with reduction in discount (2% saving), benign commodity prices (1% savings) coupled with better operating leverage and favourable FX, which may translate into strong EPS CAGR of 37% by FY:16-17 and OM expansion by around 3.10% to 16.5%.
The PV segment is expected to grow in double digit over the next few years backed by improved consumer sentiment, overall expected economic recovery, softer fuel prices and Maruti, being the leading player, is expected to be the largest beneficiary of that too. Over the years, Maruti has also increased its export to around 10% of its overall sales volume.
But some headwinds might come from any additional anti dumping duty on steel and lack of visible economic recovery in India. Also benefit of lower commodity prices & Yen (base effect) may not be there to the present proportion in the quarters ahead and Yen may be relatively stronger wrt USD after Dec'15 Fed meeting. Also there will be some competition in the PV segment due to expected aggression of the worlds of "Olas & Ubers", specially in congested Metro cities as cost of ownership of a PV is nearly double wrt using such taxis.
Recent consensus TP (FY-16) of Maruti is around 5000/- per share.
No doubt, Maruti is a great stock for portfolio investment, but considering the recent time & price action and some favorable news flow including the Pay Comm's report, which might be already discounted by the market to a great extent, the stock may be retraced to some extent and buying in major dips around 4300-4000 may be good, considering the decent risk reward ratio.
Maruti has a great run in the last two year and rallied more than 200% beating the overall market to a great extent !!
Technically, 4750-4800 zone is a major supply zone for Maruti and only consecutive closing above 4860, it may reach new high of around 5000-5400 in the short to mid term. Any one holding a buy position in it, also may watch 4500 zone, being a major positional support for Maruti.
As par BG metrics & current market conditions:
(Based on standalone TTM & Proj FWD EPS)
Current median valuation of Maruti may be around: 4400 (FY:15/TTM)
Projected fair valuations might be around: 4680-5185-5575 (FY:16-18/FWD)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| MARUTI | 149.12 | 784.7 | 30 | 4242.46 | 4546.05 | 4394.25 | 4023.26 | 4619.67 |
| MARUTI | 168.95 | 356.75 | 30 | 4515.74 | 4838.88 | 4677.31 | 4023.26 | 4619.67 |
| MARUTI | 207.45 | 410.25 | 30 | 5003.87 | 5361.95 | 5182.91 | 4023.26 | 4619.67 |
| MARUTI | 239.55 | 471.95 | 30 | 5377.10 | 5761.88 | 5569.49 | 4023.26 | 4619.67 |
Analytical Charts:
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