anish

Originally Posted by anish

Maruti Suzuki – Switch over to M&M

 Maruti has returned around 16% in August 2010 and outperformed the Sensex return by 6%.

 Outperformance is mainly due to surprising increase in sales volume and positive comments by the management.

 However, it seems that the positive volume surprise is fully reflected in the stock price and further upsides look limited.

 Despite higher volume, profit margins are unlikely to increase considerably as the company would resort to market share protection activities (advertisement and other sales promotion activities) in the wake of new launches by its competitors.

 Unfavorable exchange rate fluctuations of JPY and the euro may also affect profitability of the company. Company’s import from Japan is in the range of 22% of revenue whereas, exports to the euro zone is 7% of revenue.

 Increasing royalty and the payment is fully in JPY is another concern.

 The stock also looked heavily priced. Maruti is traded at 15 multiple of FY12 expected consolidated earnings, which appears on the higher side while compared to its peers.

 M&M is traded at 11 multiple of FY12 expected consolidated earnings at the current price of Rs.680 and the stock looks to have the potential to move up to Rs.750 over a one year term. In this scenario, one may consider a switch over from Maruti to M&M.