Maruti Suzuki’s target price has increased
India’s biggest car maker Maruti Suzuki’s durable performance in the September month has secured its case to maintain its premium price-earnings multiple in the medium term.
Also, the stock currently is witnessing upgraded earnings, thanks to the higher target of operating margins due to an improving realization and higher capacity utilization.
company stocks trading high
The impact of higher PE multiple and earnings upgrades together is helping analysts’ to upgrade their target prices in the range of Rs 6,000-6,500 from Rs 5,200 to 5,700 earlier and remains a preferable stock to play the consumption stock in India.
The Maruti Suzuki stocks have been trading at 22 times of its FY18 projected earnings before the September quarterly results, nearly 57% higher than its ten-year average.
Hence, many investors were wary of sustenance of degree of valuation premium. However, September quarterly provided more evidence why premium valuation could sustain as well more earnings growth triggers.
On the operational front, the largest mitigating factor for the investors is the firm’s ability to achieve more than 105-107% of utilization in FY17 despite having many capacity constraints. This implies that it can post volume growth of 13-14% in the current fiscal year.
Increasing production capacity
The company currently has an annual production capacity of 15 lakh units a year, and the unit of a new Gujarat plant will commission in the last quarter of FY17.
An annualized monthly production numbers in past three month shows that there are less chances of volumes lost due to capacity constraints.
Also the company is increasing the production of its newly launched vehicles such as Baleno and Breeza, which is helping the company to improve its average realization as well as bringing down its average discount level per car.
The average discount of each car in September quarter came down to Rs 16,100 from Rs 16,800 per unit in the previous quarter.
The impact of higher utilization, improving product mix and the lower average discount together is helping Maruti to improve its margins.
As a result, the operating margins in the September quarter raised up 74 points to 17.02% on YoY basis.
The demand of buoyancy and reducing reliance on Yen exposure might help to bring stability in margins going ahead.
The projected margin for the on-going and next fiscal year is 150-200 basis points lower than the margin of September quarter. This leaves ample space for margins upgrades in the next few months.
The valuation comfort for investors will emerge on two points. One, the projected Earnings Per Share (EPS) for FY18 rose to Rs 270-290 per share after the September quarter results as compared with Rs 240-260 earlier. This will lower the PE.
Secondly, with big volumes and higher earnings visibility, the market will continue to reward company’s stock with bigger premium multiple.
