Buy Maruti Suzuki with a target of Rs 7,070: HDFC Securities

HDFC Securities has maintained its BUY rating on Maruti Suzuki India Limited (MSIL), stating that it believes in the growth story of India’s largest car manufacturer. “With 20% EPS CAGR over FY17-19E and structural improvement in RoE (at close to 25% by FY19E v/s 10 year average of about 17%), we maintain a BUY on MSIL with a target price of Rs 7,070, based on 20 times multiple of FY19E EPS,” HDFC Securities said in a research report.

Shares of MSIL, which have climbed nearly 75% in the last two years compared with a gain of just 10.5% for the Sensex, today rose 3.3% on NSE, to reach an all-time high of Rs 6,582.65.

This rise in the share prices was on the back of strong Q4 results released yesterday. In the fiscal fourth quarter, MSIL recorded a net profit of Rs 1,709 crore, an increase of 15.8% on-year. This rise in profit, although slightly less than the consensus estimate of Rs 1,771.4 crore, was driven by an increase in volumes of its premium models as well as better net realisations.

“Higher contribution from Brezza, Ciaz and Baleno aided in a rise of 4.3% YoY in net Average Selling Price,” HDFC’s report further added. “We remain positive on the MSIL growth story on the back of (1) Strong volume growth, led by consistent volume uptick of Ciaz, Brezza and Baleno, and success of Ignis, (2) Increasing Average Selling Price, led by an expanding portfolio in the premium segment, (3) Fresh capacity addition from the Gujarat facility, (4) Uptick in rural demand, (5) Supporting macro tailwinds like 7th Pay Commission payout, falling interest rates, urbanisation and growing middle class,” the report added.

MSIL ended 2016-17 with a record profit of Rs 7,337 crore, a jump of 57.8% on-year, with net revenues rising 17.8% to Rs 68,035 crore, as the car maker sold a total of 1,568,603 units in the fiscal. Net sales in the quarter ended March 31, rose 20.3% on-year to Rs 18,005 crore inspite of high raw material prices hurting operating profit margins, which fell by 0.50% on-quarter to 15.2%.

“Higher Raw Material cost (+359bps YoY) was offset by lower other expenses (-171bps YoY), led by lower sales promotion expenses” HDFC reported said. “Steady market share improvement, rising rural contribution, reduced JPY exposure and improving share of premium products have improved MSIL’s positioning considerably,” HDFC report added.