{LONGTERMINVESTORS} Maruti-Investors Blindsided

Credit Suisse

MUL-No More Growth Till Gujarat On Stream

Downgrade Maruti to NEUTRAL.

After maintaining it as our top pick since April 2013, we downgrade Maruti as most of the positives now seem priced in. At ~24x 1year forward P/E, it is the most expensive auto stock globally. Both absolute P/E and its premium to MSCI India are close to an all-time peak level. Global auto OEMs have de-rated by ~20% in the last few years on structural concerns around the car industry; Maruti has re-rated by ~50% in the same period on hopes of a demand recovery and improvement in market share.

■ Some speedbumps on the horizon. Maruti has had almost flawless execution in the last few years with no slipups except the market share loss to Kwid. Margins have continued to surprise positively. However, with the start of the Gujarat plant we reckon there could be a ~100 bp impact on margins. It has had a strong product cycle with launches like Baleno and Brezza. However, now with most gaps covered, post the Ignis, the pipeline looks a bit dry as launches will be more focused on ensuring regulatory compliance. Now, there will be no significant pricing benefit from GST as small cars too will attract a 28% rate vs a 5-6% price cut envisaged earlier.

■ Nearing the end of the upgrade cycle. The gap between CS and consensus estimates has also reduced from ~20% in July-16 to just ~5% now, with an 1820% volume growth in FY18 already baked in—we do not see significant upgrades now. We increase FY17 estimates by ~8% for 2Q results but broadly maintain our FY18/FY19 estimates and TP of Rs6,000. We believe Suzuki is a better way to play the Maruti story now. Within Indian Autos we suggest a shift to Tata Motors.

■ What can surprise us positively. Since Maruti is constrained for capacity, any positive surprise has to come from margins and the confidence to build in higher margins will not come till the Gujarat plant impact is understood. Suzuki and Toyota have started talks for a possible alliance, and any product sharing arrangement that benefits Maruti would be taken positively.

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