Analysts are bullish on the prospects of Maruti Suzuki, following its robust second quarter results. Though sales were largely in line with the consensus estimates of analysts, the company’s operational margins beat expectations despite gain in the commodity prices. Capacity constraints are expected to create hitches in the second half of the FY18 but pricing power is again expected to keep up profitability.
Equity research brokerages like Emkay, Edelweiss, HDFC Securites and Jeffries have re-iterated a buy on the Maruti stock, predicting a target price between Rs 8750 to Rs 9245, from Rs 8115 when the results were announced. PhillipCapital maintained a neutral rating on the Maruti stock, with a target price of Rs 8,150, due to expensive valuations. On Monday morning trades, the stock gained Rs 113.50 or 1.3% and traded at Rs 8,225.
Maruti’s revenue grew 22% year-on-year to Rs 21,770 crore, while EBITDA margins expanded strongly by 360 basis points (one percentage point is equal to 100 basis points). Sales volumes went by 19% year-on-year to 492,118 units in the quarter, while realisations rose by 3% year-on-year to Rs 442,337 per unit. According to the company margins increased primarily because the company doled out fewer discounts and put in newer initiatives to contain raw material cost. It also said that better scale and lower cost base coupled with increased sales volume benefitted margins.
Highlights of the quarter include a strong rural growth and a higher demand for utility vehicles (UV), though the company did not suggest if there was a relation between the two. Rural sales increased a strong 22% and sales of UVs by 28.2%, an increase of 362 basis points YoY during Q2FY18.
This far, Maruti Suzuki was known as India’s small car company. That seems to be changing pretty rapidly as its premium hatchbacks like the new Baleno and crossover Vitara Breeza saw big demand and have long waiting lists. In the quarter, the company also reported that the share of first time car buyers has increased in compact sedan – Dzire to 50% vs 42% earlier. Share of petrol vehicles continue to increase for the industry and company. Company witnessed growth of 25% in petrol vehicles in Q2FY18.
Even as the fast selling models face a considerable waitlist ranging from 2-5 months, production at the recently commissioned Gujarat plant has been at around 10,500 units per month in Q2FY18 and it is only by Q4FY18 that this production is expected to be ramped up to 20,000 units by month. To that extent, the company will not be able to show a dramatic increase in volumes or revenues as it did this quarter but analysts expect that lower discounts and higher pricing to keep up the growth in EBITDA margins.
There is also an expectation that higher volumes in the Gujarat plant will bring down component costs as more and more ancillary units go on stream near the manufacturing site. The company expects to FY18 production to be pegged at 1.7 million units. Last year, the company sold 1.57 million vehicles.