Accumulate Maruti Suzuki; target of Rs 8425: Dolat Capital Market

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Dolat Capital Market's research report on Maruti Suzuki

Maruti Suzuki’s 3QFY21 EBITDA margin at 9.5% was below estimates impacted by increase in input cost (GPM slipped by 257bps QoQ), unfavorable FX movement and salary increments to employees. The company has taken an average price hike of ~2% in the month of January 21 to mitigate the impact of RM cost. Demand recovery has been good, volume grew 13.4% YoY in 3Q driven by first-time buyers (share increased to 49% vs 43% YoY), pent-up demand, and strong rural market. Low network inventory (21k vehicle, less than 1 week) and robust order backlog (216k vehicle) are augurs well for wholesale volume in coming months. Commodity price inflation is quite significant in core commodities as well as precious metals, management believes margin pressure to ease out gradually led by price hike and operating leverage. Despite margin pressure in near term, MSIL remains an attractive long term investment bet for domestic discretionary consumption. Improvement in consumer sentiments with recovery in economic activities remains a key trigger for earnings growth. Proven products, cost leadership, strong network and rural presence (+40% sales) define company’s intrinsic strengths.

Outlook

Demand prospects remain upbeat, led by healthy order-book and likely improvement in replacement demand. Near term margins may remain under pressure due to higher commodity prices, any fall in commodity price to be key positive. We estimate 37% CAGR in MSIL’s earnings over FY21-23E led by 14% growth in volume and 300bps margin expansion. We value the stock Rs 8,425 (based on 27xFY23E EPS). Maintain Accumulate.

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