Investors may do well to keep an eye on Maruti

ET Intelligence Group: Maruti Suzuki poses a classic dilemma to the average investor on D-Street: Is it a ‘buy and hold’ after a 30 per cent correction from its peak, or does the macro picture make the stock of India’s biggest carmaker a ‘no-go area’?

Of course, the average investor is concerned because despite competition, Maruti continues to sell one of two cars running on India’s roads. Hence, the fear of missing out, when the cycle turns, is genuine.

So, many investors want to begin buying the stock that’s available at 22-23 times its forward earnings. Foreign portfolio investors have raised their holding in the stock even though monthly passenger car sales showed their steepest drop in two decades in the June quarter. The passenger vehicle volume growth decline, on average, has lasted 13 months in the past 25 years, and the current downturn has already entered the 11th month, according to CLSA. This might indicate that the cycle would turn in the next few months.


As the market leader, Maruti will likely be the first to benefit from the recovery. The recent inventory data released by the Federation of Automobile Dealers Associations (FADA) suggested that inventory has declined to 25-30 days in July from 30-35 days earlier, rather close to the 21-day normal. Inventory levels of two-wheelers and commercial vehicles continue to remain elevated.

Also, the risk of a potential sales loss due to the end of the diesel line appears to be waning. Maruti is gradually increasing the proportion of petrol vehicles. To allay buyers’ concerns, dealers are telling customers that the price difference for BS-VI vehicles is only 4 per cent. It has already launched five models (accounting for nearly twothirds of its total volumes) that comply with BS VI standards.

Maruti’s petrol mix is close to 77 per cent, while the industry mix is around 66 per cent in the June quarter. The recent announcement of the government that registration of a vehicle compliant with existing emission norms will remain valid until their life could ease the concerns. In the past one month, the stock gained 8 per cent while blended earnings per share for the next 12 months dropped 2.7 per cent, according to Bloomberg. The stock is trading at 24.5 times its one-year forward projected income, a premium of 5.1 per cent over its five-year average.