We re-visit the impact of Maruti Suzuki’s accelerated depreciation policy. Our analysis strengthens our positive stance as we observe that Maruti’s cash PE ratio is much cheaper than other auto consumer discretionary spend stocks.
The company adopted an accelerated depreciation policy in 4QFY08 to factor in shorter product life-cycles, which were the outcome of fast-changing technology and faster product development.
Were this policy not followed, its EPS would have been 17.5% higher in FY09 and 14.3% in FY10. As such, the cash EPS is ~50% higher than its EPS.
Bajaj Auto is the cheapest stock in the auto consumer discretionary segment, both on PE (7.7x) and cash PE basis (6.7x). Maruti trades at a 45% premium to BA on a PE basis, but the difference narrows to just 12% on a cash PE basis.
Similarly, its mere 10% discount to industry benchmark Hero Honda widens to 31% when compared on a cash PE basis.
Considering this gap, we conclude that Maruti has further potential for stock re-rating when considered on a cash PE basis. This in turn may lead to a PE re-rating as well.
Maruti trades at 12.7x FY09e and 11.2x FY10e EPS. Our target multiple is 13.5x FY10e EPS, on par with its six-year one-year forward average PE. We maintain a BUY recommendation on the stock.