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Maruti Suzuki: Market leader continues to shine brighter…
First mover poised to tap into burgeoning demand
Auto industry has witnessed unprecedented demand in FY10-11
with the overall PV segment growing at 26% YTD. Maruti Suzuki
(MSIL) has been smart in understanding the systemic nature of the
huge demand and has initiated the process of expanding its existing
capacities by 0.5 million units to 1.75 million units by FY12. It has
been able to stave off stiff competition in the A2 segment
(comprises~ 78% YTD of PV market) and improved its market share
by 6.4% to 52.6% through its portfolio enriching exercise.
Margins to improve, going forward
With most models already undergoing a facelift in view of newer
emission norms, a majority of product related costs are behind us.
We have factored in lower upgrade cost in H2FY11E and FY12E. The
average realisation has improved marginally in this fiscal. We expect
that with exports gaining traction post the festive season,
realisations could improve further. We have factored in a 2.6%
CAGR in realisation over FY10-12E. Higher realisation coupled with
declining cost would aid expansion in margins for MSIL.
Stronger value chain networks provide edge
To cater to increasing demand from smaller towns and cities, MSIL
is targeting to expand its dealer and service network in 700 newer
cities totalling 2,000 cities with 1,500 newer service centres reaching
a mammoth 4200 by FY12-13E. This would be a critical lever to
increase sales with strongest reach and reliable quality.
Valuation
With most product related costs behind us, margins are expected to
expand, going forward. At the CMP of Rs 1551, the stock is trading
at 13.0x FY12E consolidated EPS of Rs 118.9. We have valued the
standalone entity at 15x FY12E EPS of Rs 112.6 to arrive at a value
of Rs 1689 per share. Contribution from subsidiaries and associates
is valued at Rs 46 and Rs 48 per share, respectively.
Technical Outlook
• Maruti staged a fabulous rally from lows of Dec’08 before it
entered a corrective phase from highs of Rs 1737 (Oct’09). After
10 months of correction, stock has emerged clean of down trend
line on month chart above Rs. 1370 mark indicating beginning of
fresh up trend
• On monthly Candlestick chart, formation in stock formed `Bullish
Harami’ reversal pattern in Aug’10, followed by `Bullish Engulfing
line’ pattern. These bullish formations are made near 38.2%
retracement of previous rally, therefore gaining more weightage
• 14 month RSI which is a measure of the strength has made good
base just above 50 mark over past four months and then gave a
positive cross over. This supports the bullish statement further
• Stock therefore throws good investment opportunity for long
term players. Change of view would be warranted only below
1200 levels
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