India's largest car-maker, Maruti Suzuki Ltd, sells over 1 lakh cars every month and commands over 45% share in the domestic passenger car market. It has over 1400 dealers across the country, selling an average of about 75 cars per month. Maruti Suzuki has managed to hold on it's sales volume & market share despite increase in competition from global car biggies in the Indian market over the last 5 years. Some of the global biggies like Hyundai & Honda, have managed to gain a substantial market share, while some others like Volkswagen, General Motors, Ford & Renault/Nissan, have struggled to grow beyond the initial euphoria. Many of these global auto manufacturers have successfully used their Indian units as an Export base, but struggled to penetrate the domestic market.
The Indian car market too has gone through a Up cycle & Down cycle in the last 5 years. Post US economic troubles in late 2008, the Indian Govt. implemented the 6th Pay commission in early 2009 and paid out previous 2-years arrears in lump-sum to all Govt. employees, which amounted to thousands of crores of rupees distributed & salaries of Govt. employees increasing by between 50% to 100%. Most of these people used this bonanza to buy property, cars, jewelry, tourism, shopping, etc. This resulted in car sales posting stupendous growth rates between 2009-10 to 2011-12. Most car companies expanded their manufacturing capacities & sales network. But after that excellent run for 2-3 years, growth rates have collapsed and most companies struggled to post any growth in the year 2013 & 2014. There have been hints of some growth picking up in car sales in the last few months.
Coming back to Maruti Suzuki, it is the only car company currently posting some decent growth in domestic sales after Honda & Hyundai. Maruti Suzuki derives a large chunk of it's volumes, revenues & profits from the Premium Hatchback & Compact Sedan segments. Even Hyundai is strong in these segments. But competition from other manufacturers is gearing up to attack these segments. Honda, Tata Motors & Ford are all planning new launches in these segments. Maruti Suzuki has posted a volume growth of about 13% in the first nine months of this fiscal. And the company would like to continue with it in the coming months too. But I am sure that competition will try to grab an increased share of incremental growth.
Maruti Suzuki's stock price has been on a dream run since October'2013, when it was trading well under Rs.1500 level. As of March'2015, Maruti's stock trades at over Rs.3500 level. So, what is it that is driving Maruti's stock price higher & higher, without any corresponding growth in revenues & profits. Between March'2012 & March'2014, Maruti's stock had never traded at a P/E rating higher than 24-25. The stock enjoyed these valuations when the company was posting growth rates higher than 20%. Maruti's stock trades at levels around Rs.3600/- now, which is about 33-34 times it's T-T-M EPS of Rs.107/-. These are ridiculous valuations unless the company is posting a growth of something like 30% or is expected to do so in the coming months. But neither of that is true.
( Click Here for Maruti Suzuki's Results Summary Page )
Look at the Total Income chart. The growth rate in recent quarters can at-best be called moderate, not the kind of growth that deserves high valuations. The T-T-M EBITDA and EPS are at about the same level as they were in December'2013, i.e. there has hardly been any growth on this front. At the very best Maruti Suzuki can be expected to grow in line with the growth of the industry, i.e. at about 10-12% Y-o-Y in the coming months & quarters. Even if the company manages to improve it's profit margins to some extent, the Net Profit & EPS might grow at about 15-17%. These growth rates Do Not deserve such high valuations.
Suzuki's manufacturing facility in Gujarat is slated to come up in the next 2-3 years, not before that. I think Maruti Suzuki's stock trades at about Rs.800 to 1000 over it's fair value. The stock might just hold around the current levels of Rs.3300-3600, only if the growth rates improve. Still it would be a good idea to investors to reduce their exposure to Maruti at current levels and re-enter a few months later when valuations are more modest.
The Indian car market too has gone through a Up cycle & Down cycle in the last 5 years. Post US economic troubles in late 2008, the Indian Govt. implemented the 6th Pay commission in early 2009 and paid out previous 2-years arrears in lump-sum to all Govt. employees, which amounted to thousands of crores of rupees distributed & salaries of Govt. employees increasing by between 50% to 100%. Most of these people used this bonanza to buy property, cars, jewelry, tourism, shopping, etc. This resulted in car sales posting stupendous growth rates between 2009-10 to 2011-12. Most car companies expanded their manufacturing capacities & sales network. But after that excellent run for 2-3 years, growth rates have collapsed and most companies struggled to post any growth in the year 2013 & 2014. There have been hints of some growth picking up in car sales in the last few months.
Coming back to Maruti Suzuki, it is the only car company currently posting some decent growth in domestic sales after Honda & Hyundai. Maruti Suzuki derives a large chunk of it's volumes, revenues & profits from the Premium Hatchback & Compact Sedan segments. Even Hyundai is strong in these segments. But competition from other manufacturers is gearing up to attack these segments. Honda, Tata Motors & Ford are all planning new launches in these segments. Maruti Suzuki has posted a volume growth of about 13% in the first nine months of this fiscal. And the company would like to continue with it in the coming months too. But I am sure that competition will try to grab an increased share of incremental growth.
Maruti Suzuki's stock price has been on a dream run since October'2013, when it was trading well under Rs.1500 level. As of March'2015, Maruti's stock trades at over Rs.3500 level. So, what is it that is driving Maruti's stock price higher & higher, without any corresponding growth in revenues & profits. Between March'2012 & March'2014, Maruti's stock had never traded at a P/E rating higher than 24-25. The stock enjoyed these valuations when the company was posting growth rates higher than 20%. Maruti's stock trades at levels around Rs.3600/- now, which is about 33-34 times it's T-T-M EPS of Rs.107/-. These are ridiculous valuations unless the company is posting a growth of something like 30% or is expected to do so in the coming months. But neither of that is true.
( Click Here for Maruti Suzuki's Results Summary Page )
Look at the Total Income chart. The growth rate in recent quarters can at-best be called moderate, not the kind of growth that deserves high valuations. The T-T-M EBITDA and EPS are at about the same level as they were in December'2013, i.e. there has hardly been any growth on this front. At the very best Maruti Suzuki can be expected to grow in line with the growth of the industry, i.e. at about 10-12% Y-o-Y in the coming months & quarters. Even if the company manages to improve it's profit margins to some extent, the Net Profit & EPS might grow at about 15-17%. These growth rates Do Not deserve such high valuations.
Suzuki's manufacturing facility in Gujarat is slated to come up in the next 2-3 years, not before that. I think Maruti Suzuki's stock trades at about Rs.800 to 1000 over it's fair value. The stock might just hold around the current levels of Rs.3300-3600, only if the growth rates improve. Still it would be a good idea to investors to reduce their exposure to Maruti at current levels and re-enter a few months later when valuations are more modest.
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