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Gaining Speed

There are concerns over Maruti's manufacturing deal with Suzuki, but experts say it's a good time to buy the stock.
Rahul Oberoi/Money Today        Print Edition: March 2014
Gaining Speed
Photo: Reuters

Maruti Suzuki has announced a plan to expand its Gujarat plant through a 100% subsidiary. This has raised many questions in the minds of investors. As a result, the stock plunged over 8% on January 28, the day the announcement was made, to Rs 1,563. The announcement overshadowed the healthy December quarter numbers announced on the same day. However, on account of buying at lower levels, the stock rebounded and rose 7.11% the next day.

STORY SO FAR

Maruti Suzuki India acquired 640 acres in Becharaji and 550 acres in Vithalapur in Gujarat's Mehsana district for manufacturing facilities.

The land will now be leased by Maruti Suzuki to the subsidiary company of Suzuki Motors for establishing production and related facilities. The subsidiary will sell vehicles only to Maruti Suzuki. The price of the vehicles to Maruti Suzuki will include the actual cost of production and adequate cash (net of all tax) to cover incremental capital expenditure requirements.

According to Karvy Stock Broking, the arrangement will not have any near-term impact as it will take three-four years for the Gujarat plant to be operational.

Vikram Dhawan, director, Equentis Capital, says, "The exact financial implications of the deal are not known. This has led to some uncertainty about future earnings and volatility in the stock."

VALUATIONS

On February 7, the stock was at Rs 1,665 with price-to-earnings ratio and earnings per share, or EPS, of 15.61 and Rs 106.68, respectively.

Dhawan of Equentis Capital says the valuation is attractive. "Maruti is one of the better plays in the four-wheeler sector and is fairly valued at Rs 1,500-1,600. This is the level to start accumulating the stock. We expect the stock to return 9% in the next few quarters. In spite of the economic slowdown, we expect EPS growth and steady operating margins in the second half of 2014 as recovery in the global economy will bolster exports, which will more than compensate for the slack in domestic sales."

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