Shares of Maruti Suzuki rose to a record high of R4,155 on Wednesday, after foreign brokerage Credit Suisse increased the target price by 17% to R5,100. The stock rallied 2.63% while the benchmark Sensex added 0.95%. Trading volumes doubled against its 30-day average volume. Over 6.3 lakh shares traded on BSE and NSE combined.
Credit Suisse argued that the upcoming 7th Pay Commission, to be submitted in October 2015, should be a big trigger for four-wheeler demand in FY17. The brokerage said that a similar pay increase post 6th Pay Commission implemented in August 2008, led to a ten- fold increase in Maruti’s sales to government employees from FY08 to FY12. The share of sales to government employees rose in this period from 2% to ~15%.
“We are assuming that the 7th PC recommendations will be implemented from July 2016 and are now building it in our numbers. We increase our domestic volume growth estimate for FY17 from 17% to 23%, resulting in a ~9% increase in our FY17 estimate,” analysts Jatin Chawla and Akshay Saxena said in a research note dated July 14.
The upgrade augmented the market value of the car maker by R3,211 crore to R1.255 lakh crore. With this gain the gap in market capitalisation of Maruti with that of its competitor Tata Motors narrowed to R557 crore. The total market value of Tata Motors on Wednesday stood at R1.260 lakh crore. This is the smallest difference between the market value of two auto majors since April 2010.
The stock has yielded a return 10 times higher than the 2.5% YTD return on the benchmark Sensex.
Going ahead, the market value gap between the two auto-maker may come down further given that a likely increase in FII investment limit for Maruti is considered to be another trigger for the price momentum.
On the other hand, the slowdown in Chinese market – the biggest market for its luxury cars- has been a big cause of worry for Tata Motors. The stock has lost about 34% from the peak it touched in the end of January this year. In the January-March quarter, sales of Jaguar Land Rover (JLR) units fell 20% compared to 36% growth in the same quarter of FY14. As a result, the carmaker reported a 56% y-o-y decline in net profit to R1,716.5 crore.
According to Credit Suisse, a probable increase in overseas investment limit in Maruti stock in October 2015 to 40% from current 26% could also be another catalyst, which may result into its inclusion in MSCI benchmark index.