Maruti Suzuki Share price: Driving on growth, says Sharekhan

Maruti Suzuki Share price: Maruti is witnessing recovery in passenger vehicle (PV) demand. Outlook for the festive season is good with strong recovery expected from FY2022, driven by normalisation of economic activities. Operating leverage, cost-control measures and lower discounting would drive margin improvement. Sharekhan have revised their earnings upwards by 10.0% and 9.7% for FY2022E and FY2023E, respectively, giving a better outlook for the PV segment. Sharekhan have valued the stock by assigning a slight premium to average long-term P/Core EPS multiple of 30x on Maruti’s FY2023E earnings and valuing cash and equivalents at 1x to arrive at a revised price target of Rs 8500, giving an upside of further 10% from current levels. The stock is attractively valued at P/E multiple of 24.5x and EV/EBITDA multiple of 17.4x its FY2023 estimates. Sharekhan retains their Buy rating on Maruti Suzuki with a revised price target of Rs 8500.

Sector view - PV industry demand improving sequentially; Expect strong recovery from FY2022:

The PV industry turned positive in August 2020 and is showing improvement every month. Aggregate volumes registered by key OEMs in the PV segment witnessed growth of 12.5% yoy in November 2020. Channel check suggests strong enquiry and order book post the festive season across the OEMs. Sharekhan expects strong recovery from FY2022, driven by normalisation of economic activity and pent-up demand (the industry has been in the downcycle for the past seven to eight quarters). Operating leverage and reduction in discounting due to pick-up in volumes would lead to the PV industry posting better margins in the coming quarters.

Maruti Suzuki outlook - Strong earnings growth from the core business:

Maruti Suzuki is witnessing strong recovery in sales volumes and is likely to have FY2021E-end growth flat on a yoy basis, despite a 36.6% yoy decline in H1 FY2021 due to COVID-19 pandemic. Channel check suggests that demand in the PV segment remains buoyant even after the festive season. Retail sales have registered strong growth of 17-18% yoy in the last 15 days of November 2020 post- festive sales. This is a strong number and underpins our positive view on the sector. Exports are also picking up, registering 29.7% yoy growth in November 2020. Sharekhan expects the improving scenario in other geographies is likely to help Maruti register growth in exports. However, Sharekhan expects domestic growth to be the key benefactor for the company. Marutis supply issues are no worry going forward. The company is operating at more than 90% capacity utilisation.

Key Risks for Maruti Suzuki:

Maruti Suzuki has a weak SUV portfolio and can restrict growth once urban demand comes back strongly. However, Sharekhan is more positive on rural demand and believes Maruti to be the beneficiary. Š Rising input prices may impact margins, if rising commodity prices could not be passed on to customers. In a scenario of price competition, Maruti Suzuki margin may get impacted negatively. Š Second wave of COVID-19 may impact mobility and impact the company’s sales.