The coronavirus outbreak has been tough for Maruti Suzuki India (MSIL) as lockdowns hit production as well as sales and now a chip shortage is plaguing India’s biggest carmaker.
The stock has been under pressure this year after hitting its 52-week high of Rs 8,400 on January 13.
Shares of MSIL are down 10 percent year-to-date (YTD), while the BSE Auto index has gained 9 percent. Equity benchmark the Sensex has rallied 22 percent during the period.
Some brokerages, however, think the stock is about to make a turnaround and this is the darkest hour before the dawn for the company.
Emkay Global Financial Services sees a 25 percent upside in the stock. It has a “buy” call on it, with a target price of Rs 8,600.
The brokerage firm has reduced FY22 and FY23 volume growth estimates by 15 percent and 7 percent, respectively, but has retained the FY24 forecast.
"Following the revision, we expect revenue and earnings CAGR of 24 percent and 61 percent, respectively, over FY22-24E. We lower our September 2022 target price to Rs 8,600 from Rs 9,000 earlier, based on 28
times core price-to-earnings (P/E) and net cash per share of Rs 1,541. Our core P/E is backed by a discounted cash flow (DCF) model," Emkay said.
Healthy order book, price hikes to offer support
The carmaker is expected to increase prices across models in September, the third such hike in FY21-22 after April and July.
The hike is expected to come just before the start of the festival season that kicks off with Ganesh Chaturthi on September 10.
The automaker is hiking prices to cushion its falling profit following a sharp rise in commodity prices. The move is expected to give a boost to the stock price.
The company's order book looks healthy which, too, augurs well for the stock.
"MSIL has a healthy order book of over 1,50,000 units, and supply-related constraints remain the only challenge in the near term," Emkay said.
Despite a healthy order book, volume is likely to suffer as the shortage of electronic equipment will weigh on the company's performance in the near term.
The company will see a 60 percent cut in production in September due to a semiconductor shortage. This is the second consecutive monthly cut due to the chip shortage.
Emkay reduced its volume expectation for MSIL by 15 percent to 16.4 lakh units in FY22E, implying 12 percent growth.
The company's August sales were lacklustre because of components shortage. It reported a 5 percent increase in sales at 1,30,699 units in August.
Chip shortages are expected to persist in the second as well as the third quarter and supplies are expected to improve in a staggered manner.
Emkay Global believes lead times may decrease to 18-20 weeks by Q4FY22 and may come down to normal 8-12 weeks by FY23-end.
However, there are some tailwinds too. With macroeconomic growth and a normal monsoon, the company's sales numbers are likely to pick up. Low interest rates and the festival season are also positive for the automaker.
"We continue to believe that the industry will see an upcycle in the next two-three years, driven by improving macros, pick-up in replacement demand, positive rural sentiments and low-interest rates. We expect MSIL to record a 20 percent CAGR during FY22-24E," said Emkay Global.
The company's exports have improved notably in recent months on strong demand in Africa and Latin America markets.
"MSIL has expanded the network by increasing its own distributors and utilising Suzuki and Toyota’s global networks. We expect exports to double in FY22E and further improve by a 26 percent CAGR over FY22-24E," Emkay said.
The company's management targets to reach EBIT margins of 8-10 percent in the future, driven by price increases, better scale and cost savings. “Our estimates factor in an EBIT margin of 7.9 percent and 9.3 percent in FY23 and FY24," Emkay said.
The company continues to focus on cost-reduction efforts. It is passing on commodity inflation with a lag and is also hedging commodities.
Other than cost-reduction, the company is planning to initiate an aggressive model action plan in the next two years to fill up the white-spaces like compact SUVs (above 4m), mid-size SUVs/MPVs and xEVs,
Emkay Global said.
The company is pinning its hope on macro revival along with new launches and price hikes but much will depend on the pace of economic growth and the course of the pandemic.
"Delay in economic recovery, a third COVID-19 wave leading to another round of lockdowns, failure of new products, increase in competitive intensity, and adverse movement in currency and commodity prices are
the key risks for the stock," Emkay Global said.
Brokerage firm Sharekhan has a “buy” call on the stock with a target price of Rs 7,707.
"MSIL is likely to benefit from buoyant demand for passenger vehicles, driven by rising offtake in tier-2 and tier-3 cities and rural areas. MSIL is expected to defend its market share despite rising competition in the compact SUV segment, aided by strong product portfolio and position, brand appeal and ability to frequently launch new models," Sharekhan said.
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