The Maruti Suzuki India has not just been the top performing Auto share price in 2013, but has significantly outperformed the market. The past performance of Maruti Suzuki India stock was driven by two key factorsómarket share gains in a falling market, and a robust margin performance.
Going forward in 2014/15, a significant upside on the stock will be contingent on macro-recovery and car market revival, in our view. A resilient margin performance should protect earnings downside and a robust product cycle should help the company maintain its leadership position and support valuations, but we believe the real stock upside has to be driven by macro-economic recovery.
Margin resilience should protect earnings downside: The company is likely to beat the current consensus margin estimates, even if the volume assumptions are missed. As seen in charts, the company reported peak 13% margins in Q2, despite peak discounts and a bottom in capacity utilisation. Furthermore, the JPY (Japanese yen) has depreciated by 6% since then.
Clearly, there is upside on margins. In the bear case, assuming volumes remain flat in FY15 (compared to our estimate of 12% year-on-year), the downside to earnings is not more than 10%.
A robust product pipeline (three-five years) support valuations: Suzuki has 14 new models lined up for India in the next few years. This is clearly an up-cycle for Maruti Suzuki's product portfolio and should keep the consumer sentiment buoyant. This may support valuations even in the near term even though EPS (earnings per share) contribution from the new models will be modest in FY15 ).
Eventually, the auto market recovery will drive the stock upwards: We are currently factoring in a 12% volume growth in FY15 and 12.5% Ebitda margins. Both have upside in a demand recovery. There is pent-up demand from the past three years, and as customer sentiment improves, we believe market growth could overshoot upwards. This raises our expectations for a turnaround in the industry in 2014/15, while near-term trends have remained muted (both volumes and pricing).
We increase our FY15e EPS by 5% to factor in impact of JPY depreciation on margins and increase our DCF (discounted cash flow)-based target price to R2,100 (from R1,780) on a better longer term margin outlook. We are 7% above consensus on FY15e earnings.