Moneycontrol Research Team
In continuation of our weekly tactical call to guide investors to look at large cap investment opportunities, we have chosen Maruti Suzuki India Limited (MSIL) as the pick of the week.
Delayed festive season, Kerala floods, increasing cost of ownership, surging fuel prices and rising insurance cost have dampened passenger vehicle demand, thereby impacting MSIL’s performance.
MSIL has a monopoly in passenger vehicle market in India led by strong dealership network, brand loyalty on the back of competitive prices and resale value. The country’s top carmaker commands about 57 percent market share in passenger vehicles.
The stock is likely to fancy investors on the back of following factors:
Recent weakening macroeconomic factors have played a spoilsport for demand. However, we believe, that this will not continue forever. Strong demand is expected to come from rural market on the back of the government’s focus toward rural areas ahead of election and increase in minimum support price (MSP). Urban markets’ demand is also expected to remain stronger on the back of higher disposable incomes and low penetration of cars in India.
Electronic parts imports hurt Maruti Suzuki margin given the rupee depreciation. Its management has highlighted that there are technology challenges but they are working to improve localisation of parts.
Strong product portfolio and inclusion of premium products
MSIL has planned slew of launches over the next three years. Its new Swift and Swift Dzire are doing phenomenally well. Additionally, over the years, MSIL has successfully reoriented its product portfolio dominated by small cars to premium products, which cater to the changing customer preference.
Strong distribution network – a moat
MSIL’s leadership is indicated by its strong distribution network. This distribution network is a moat to the company, which gives it a competitive advantage in an otherwise highly competitive industry.
To cater to strong demand outlook, MSIL has chalked out a capacity expansion plan. Gujarat plant’s phase I has already started production and is expected to produce 250,000 units this year and second phase would start from January 2019.
Valuation at very reasonable levels
In light of subdued demand and outlook, the stock has corrected quite significantly and is down 33 percent from 52-week high making the valuation very reasonable. It currently trades at 23.7 times FY19 and 21.1 times FY20 projected earnings.