We maintain our buy rating on Maruti Suzuki with a target price of R2,665 a share. With an improved economic outlook and consequent improvement in discretionary income and consumer sentiments, we expect passenger vehicle (PV) industry to rebound strongly over the next 2-3 years .
Given its leadership position and three new launches (Celerio, Ciaz in Q2FY15 and compact SUV in Q4FY15), we expect MSIL to be a key beneficiary of the upturn in PV demand. We estimate robust 26% EPS CAGR on 13.7% volume CAGR (implying 3.3% CAGR over FY11-16e) and margin expansion of 150 bps over FY14-16e to 13.2%. The stock trades at 20.3x/15.9x FY15e/16e consolidated EPS of R117.2/ R149.4.
Maruti Suzuki outlined the agreement details with Suzuki Motor Corporation (SMC) for expansion of the Gujarat plant under 100% subsidiary of SMC, Suzuki Gujarat (SG), along with details of the term sheet. As indicated earlier, MSIL would voluntarily seek minority shareholders’ approval for this arrangement.
The additional clarifications by MSIL on proposed expansion of the Gujarat plant further safeguards minority shareholders’ interest. MSIL could potentially save R10,500 crore, assuming post-tax return of 8.25% p.a. for the 15-year contract period. Additional funds would be used to strengthen marketing, sales infrastructure, R&D, overseas market penetration.