Maruti Suzuki S-Cross
After a stellar 60% rally thus far in calendar year 2017 (CY17) and outperforming the S&P BSE Sensex and S&P BSE Auto indices that rose 26% and 25% during this period, can Maruti Suzuki hit the five-figure mark over the next one year? Analysts at Nomura believe that Maruti, which is already trading near its 52-week high level on the National Stock Exchange (NSE) can come close to hitting this figure.
In Nomura's latest report on the outlook for global auto companies for 2018, Maruti Suzuki with a price target of Rs 9,843 features among the top regional pick for 2018 along with China’s BYD and United States headquartered Tesla, with Toyota being their preferred global pick in the auto sector.
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“Strong demand for new models, benefits from market trend towards premiumisation, and healthy cash flow generation, are key positives which make Maruti Suzuki our top pick in the Indian auto sector," writes Kapil Singh, an analyst at Nomura tracking the sector in a co-authored report.
India’s passenger vehicle (PV) market is in the midst of a structural growth cycle and is likely to see a 12-14% CAGR over the next 5 – 10 years, Nomura says, underpinned by 6-7% annual growth in gross domestic product (GDP). With a pick-up in growth (Nomura pegs GDP growth at 7.6% by 2019F), new vehicle sales could grow at a compounded annual growth rate (CAGR) of 12 – 14% over the next few years.
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As regards the two-wheeler segment, Nomura expects growth to stay around a 10% CAGR over the next 5 – 10 years, given higher ownership levels. However, scooter growth could be much stronger at around 15-20% driven by rural preferences and a growing number of working women. Medium and heavy commercial vehicle (MHCV) growth is likely to remain strong (15% y-o-y in FY19/3F) due to the enforcement of overloading restrictions and improving industrial activity, Nomura believes.
“Vehicle ownership in India, estimated by us at 28 per 1,000 at the end of FY17/3, is near an inflection point, similar to that seen in markets such as China, South Korea, and Japan in the past. Rapid growth in vehicle ownership in these countries was supported by greater-than-8% growth in GDP, close to what we are seeing in India now,” Singh writes.
Maruti recently announced its intention to introduce electric vehicles (EVs) in India by 2020 with technical support from Toyota. Currently under an agreement with its Japanese parent, Maruti already sources gasoline / diesel cars produced by Suzuki in India. According to reports, the company is also aggressively growing its capacity in Sanand (Gujarat) to cater to demand by 2020.
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“The company has proved everybody wrong by retaining market share over the last few years. They were also able to manage the currency risk (yen) effectively. Capacity expansion augurs well for Maruti in the long run as it will add to the bottom-line without burning too much cash. I do think the stock can hit Rs 10,000 levels over the next couple of years,” says G. Chokkalingam, founder & managing director, Equinomics Research.