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Will the rally in Maruti's stock sustain?

The logo of Maruti Suzuki India Limited is seen on a glass door at a showroom in New Delhi

The logo of Maruti Suzuki India Limited is seen on a glass door at a showroom in New Delhi

Maruti Suzuki hit a 52-week high of Rs 5,103.90 on the National Stock Exchange in intra-day deals on Tuesday. From a 52-week low on February 29, it has rallied around 60 per cent, as compared to a 23 per cent rise in the general benchmark index, the Nifty 50 and of 36 per cent in the Nifty Auto index during this period.

Overall sentiment for the sector has been improving with an above-normal monsoon, which could trigger rural demand for entry-level vehicles. Increased payout on account of the pay commission implementation has also bolstered sentiment.

Passage of the goods and services tax (GST) Bill is another plus, the implementation of which (assuming an 18 per cent tax rate) will also benefit Maruti Suzuki by stimulating demand, analysts say.

GST will also mean other gains, reports suggest. "Entry level cars would see reduction in on-road prices by around eight per cent, driving demand for this segment. Maruti Suzuki, which has over 80 per cent of this segment, would be the biggest beneficiary," says a report from Motilal Oswal Research.

Another factor driving the positive sentiment has been the acceptance of Maruti's recent vehicle launches. FY16 saw the highest number of new product launches in a year from it, with the S-Cross, Baleno and Vitara Brezza. These and the Ciaz have given Maruti a good foothold in the premium segment, where the company intends to be a key player.

"Business performance in the latest quarter and attractive valuation were the reasons behind such a (stock) run-up in the past few months. It is one of the few large companies to post double-digit growth in net profits consistently over the past five years, despite overall slowdown in corporate earnings," says G. Chokkalingam, managing director at Equinomics Research & Advisory.

In the annual report for FY16, issued last week, Maruti is on course to sell two million cars by 2020, a 40 per cent jump from the 1.42 mn it sold in 2015-16. It plans to launch 15 new cars by 2020 and expand its sales network.

Stock strategy

So, what should investors do with the stock? Is it still a good buy at these levels?

Better competitive positioning, sharp improvement in return on invested capital and reduced volatility in earnings per share, due to lower foreign exchange exposure, are some of the factors, analysts say, likely to work in Maruti's favour. However, given the sharp rally in the stock, they're also cautious.

"We expect a modest compounded annual growth rate (CAGR) in earnings before interest, taxes, depreciation and amortisation (Ebitda) of 13 per cent over FY16-18. Capital expenditure (capex) spending is likely to be elevated, due to spending for marketing infrastructure, product development and real estate. However, the valuation of 11 times the FY18 estimate for Ebitda (20 per cent premium to the five-year historic average) seems to ignore these margin/capex concerns. Our estimates and target price of Rs 4,450 (implied 9.6 times the FY18 Ebitda) remain unchanged. Maintain 'sell' (rating)," say Ashvin Shetty, Gaurav Khandelwal and Ritu Modi of Ambit Capital, in a recent report.

A K Prabhakar, head of research at IDBI Capital, is cautiously optimistic. "The stock is currently trading at premium valuations of around 23 times its FY18 earnings, well above the historical norm. While Maruti's fundamentals are excellent, we would recommend investors seek a lower price point for entry," he advises.

By Bloomberg data, since July 26 (when the operational results were announced), 31 of 45 analysts had a buy, outperform or add rating on the stock. Ten has a hold/neutral view and only four recommended selling. However, their average one-year target price is Rs 4,889, which is 3.2 per cent lower than Wednesday's price. Thus, indicating that most of the positives are already priced in.