Driving India | Value Research Though the Indian auto sector has been in the midst of a tough period, things may be quietly turning around for Maruti
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Though the Indian auto sector has been in the midst of a tough period, things may be quietly turning around for Maruti

The Indian auto sector is in the midst of its toughest period in the last decade. All auto manufacturers are reeling from lower sales and even lower profits. Maruti is no exception. But things may quietly be turning around.

Why you should add Maruti to your portfolio?
First thing first. The current financial year is going to be a tough one for all auto companies and any meaningful improvement is expected to be still a year away. But there have been signs of improvement. Demand for small entry level cars has seen a definite pick up this year. That may signal a slow turnaround.
The Indian auto sector has seen a marked move away from petrol driven cars to SUVs in the last 2-3 years. High difference between petrol and diesel prices ensured demand for SUVs remained high. Consequently, demand for entry level cars fell by 11 and 12 per cent in FY12 and FY13, respectively. In recent times, that gap has reduced considerably and the demand for entry level petrol cars is up again. This year demand for entry level cars is up 6 per cent. Maruti which has a 50 per cent market share in this segment is set to be one of the biggest gainers when this revival sustains.
In the meantime, Maruti is using the slowdown to increase its capacity at a cost of Rs 11,500 crore over the next three years. During this period, it is expected to generate cash flows to the tune of Rs 17,600 crore (Deutsche Bank estimates). That would leave the company with an estimated free cash flow of Rs 6,100 crore (FY16).
Valuations are another reason to add Maruti to your portfolio. At 15 times earnings, Maruti is lower than its 10-year median valuation of 18 times. A zero debt, cash rich status (Maruti had a net cash of over Rs 4,600 crore in FY13) are added bonuses to help the company tide over tough market conditions better than most of its competition.




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