• Breaking News

    Friday, 17 July 2015

    MARUTI SUZUKI TO GET BOOST FROM SEVENTH PAY COMMISSION'S RECOMMENDATIONS

    MUMBAI: Maruti Suzuki has regained its ranking as the country's most valuable automobile company with investors preferring domestic discretionary play even as the shine is going off China, hurting Tata Motors' Jaguar Land Rover unit. For the first time since March 2010, Maruti Suzuki has topped market capitalisation among Indian automakers.

    Maruti Suzuki ended Thursday at Rs 4,180, up 0.61 per cent, for a market capitalisation of Rs 1.26 lakh crore. Tata Motors closed at Rs 395.10, up 0.2 per cent, for a market value of Rs 1.13 lakh crore, according to BSE data. According to data compiled by ETIG, the market capitalisation of Tata Motors was Rs 20,619 crore higher than that of Maruti on average since the latter was listed in 2003.

    Maruti raced ahead of Tata Motors between 2008 and 2010. The Tata Motors' stock outperformed Maruti Suzuki until June 7, when the Chinese decline kicked in. Maruti and Tata Motors have delivered a return of 304 per cent and 240 per cent, respectively, over the past five years.

    The key reason why Maruti's stock has outperformed Tata Motors lies in its projected earnings growth. Maruti has continuously witnessed earnings upgrades on account of multiple triggers such as a strong pipeline of new launches, margin expansion on lower discounts, favourable foreign currency impact and the ability to outperform industry growth despite having a 45 per cent marketshare in
    passenger vehicles.

    Investors expect Maruti Suzuki to get a boost from the Seventh Pay Commission's recommendations later this year that will lead to salaries of government employees rising. The Pay Commission is expected to submit its report by October and this is likely to be implemented from July 2016, likely adding to an expected double-digit growth in passenger car sales in FY17. Maruti Suzuki is expected to be the main beneficiary, analysts said. The last Pay Commission report had resulted in car sales rising 18 per cent annually between FY09 and FY11.

    "The Sixth Pay Commission, which was implemented in August 2008, resulted in almost 10 times increase in Maruti's sales to
    government employees from FY08 to FY12," Jatin Chawla and Akshay Saxena, research analysts at Credit Suisse, wrote in a July 15 report.

    The market value of Tata Motors surged past Maruti Suzuki in 2010, after the Indian company turned JLR around following its acquisition from Ford in 2008. JLR more than
    made up for Tata Motors' poor domestic performance over the past few years. The Chinese decline has forced many carmakers to scale down targets.

    JLR said June sales were flat because strong growth in Europe and North America was offset
    by a dramatic slowdown in China. German luxury carmaker Audi has abandoned a target to sell 600,000 cars this year in China, its biggest market, as the country's stock market rout sapped demand for luxury cars,

    Bloomberg reported on Thursday. Audi's Chinese sales rose 1.9 per cent to 273,853 cars in the first half. Credit Suisse reckons that a salary increase could boost demand for cars in India by 10 per cent. It upgraded the expectation for volume growth at Maruti Suzuki for FY17 to 23 per cent from 17 per
    cent on account of the expected pay commission boost. It also increased the stock's target price to Rs 5,100 at the end of 2017 fromRs 4,370 previously. Maruti expects there will be a repeat this time around.

    "We have sold almost 200,000 vehicles to government employees in FY15," said Randhir Singh Kalsi, executive director, sales, Maruti Suzuki. "We certainly believe we can get more incremental volumes after implementation of the Seventh Pay Commission." Maruti saw a pickup mostly in the Rs 2.5-5 lakh price bracket last time around.
    Others also expect a bounce. "An increase in disposable income certainly will help potential buyers to purchase high quality products. So, definitely a salary hike of government employee will propel the industry growth," said Rakesh Srivastava, president, sales, Hyundai India. Growth was seen across segments and geographies after the last pay increase, he said.

    There are about 30 lakh central government employees while state government workers number about three times that. About a fourth of them are paidRs 30,000-50,000 per month and nearly 10 per cent may buy cars, Credit Suisse estimates, adding up to an additional volume of about 300,000 units.

    Among those who get a pay increase, those who have set aside enough for children's education and own a home will be the ones most likely to buy a new car, said Maruti's Kalsi, pointing out that brands will need to target the entire family, not just breadwinners.

    "Importantly, car buying is no longer a prerogative of the parents and their teenage children now play an important role in choosing a car," he said.

    Changing consumer preferences also indicate that it won't be just entry-level cars that are likely to rise; some may look to upgrade.

    "We are (expecting) incremental demand from employees for compact as well as sedan cars,"
    said Srivastava of Hyundai. Apart from the additional pay, arrears will also play a role. The Sixth Pay Commission award saw employees getting arrears for 32 months in two installments in FY09 and FY10. This means that any delays in payment enhance the ability of an employee to buy a car. Car makers offer special discounts for government employees and it's easier for them to get loans from public sector banks as well.

    Source:- The Economic Times

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