Exploring Value Investing: Maruti Suzuki and Cipla as Potential Buys

Value investing is a strategy that appeals to those looking to acquire solid companies at attractive prices, leaving room for growth potential. A key metric in this strategy is the price-to-earnings (P/E) ratio, which indicates whether a stock is undervalued compared to its historical average or that of its competitors. However, a low valuation can sometimes signal underlying problems, such as declining earnings or financial instability.

In this context, we spotlight two companies currently trading below their 10-year median P/E ratios: Maruti Suzuki and Cipla. The crucial question is whether these stocks represent valuable investments or potential pitfalls.

Maruti Suzuki: A Leader in the Automotive Sector

Founded in 1981, Maruti Suzuki operates as a subsidiary of Suzuki Motor Corporation, which retains a 58.2% ownership stake. Renowned for its innovative products and services tailored to the Indian market, Maruti Suzuki stands out as the premier name in passenger vehicles (PVs), commanding approximately 42% of the domestic market share and ranking as India’s largest PV exporter.

Market Dominance and Growth

• Mini Car Segment: Maruti dominates this space with a 94% market share, largely due to its popular models like the Alto and S-Presso.
• Compact Cars: The company holds a 66% market share, further solidifying its leadership.

In FY24, Maruti achieved a record sales volume of 1.79 million units, including 33,763 units of light commercial vehicles, representing a 9.5% increase compared to its competitors’ 8% growth. Notably, strong demand for SUVs has propelled its sales, with a 119% year-over-year increase in this segment, elevating its market share to 20.8%.

Financial Highlights

• Net Sales: Rose by 20% to ₹1.35 trillion.
• Net Profit: Increased by an impressive 64%, totaling ₹132 billion.
• Return on Equity: Improved by 4.2 percentage points to 18.3%.

Despite the robust performance, FY25 has seen a slowdown, with only 4.6% growth expected, primarily due to economic factors and inflation. However, Maruti remains optimistic about new launches, including the e-Vitara, predicting sustained export growth.

Valuation Insights

Currently, Maruti trades at a P/E ratio of 26.6x, significantly lower than its 10-year median of 37.6x. This scenario positions the company well within India’s growth trajectory for passenger vehicles, contingent on economic recovery.

Cipla: A Strong Contender in Pharmaceuticals

Established in 1935, Cipla has evolved into a global pharmaceutical powerhouse with a diverse portfolio of over 1,500 products across 65 therapeutic categories. The company supplies both branded and generic medications to 170+ countries, solidifying its position as the third-largest pharmaceutical firm in India with a 5.56% market share.

Revenue Breakdown and Growth

• Domestic Focus: Approximately 43% of its revenue stems from India, with high-margin chronic segments driving 60% of domestic sales.
• International Sales: Contributed significantly, with 30% from North America and 12% from Africa.

In FY24, Cipla’s consolidated sales surged by 13% to ₹257.7 billion, led by strong performances in its U.S. operations, particularly with the launch of generic Revlimid. The company’s gross margin increased to 65.8%, reflecting improved operational efficiencies.

Future Prospects

Cipla’s growth trajectory has faced challenges, with a 6.2% revenue increase reported for 9MFY25. Still, its EBITDA margin rose to 26.8%, indicating resilience amid market pressures.

Cipla boasts a promising pipeline with 112 abbreviated new drug applications (ANDAs) awaiting approval from the U.S. Food and Drug Administration (FDA). The company’s commitment to research and development is evident, with 6.1% of its FY24 revenue allocated to strengthen its pipeline.

Conclusion: Are They Value Opportunities or Traps?

Both Maruti Suzuki and Cipla showcase compelling investment cases, trading below their historical P/E ratios. Maruti excels in market leadership and product innovations, while Cipla benefits from a robust domestic presence and a growing U.S. generics pipeline. However, investors should monitor the recent slowdown in growth for both companies, weighing the potential for upcoming product launches and overall earnings momentum carefully.

As the market evolves, these companies may provide valuable opportunities for astute investors willing to navigate the complexities of value investing.