Maruti Suzuki: Centrum Broking initiates coverage with ‘buy’, sees 46% upside; here’s why

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The brokerage expects Maruti Suzuki’s outperformance to be driven by, (1) reshaping of a portfolio driven by SUVs, (2) visibility on EV entry in FY25, and (3) consolidation of SMG.

It has initiated coverage on the stock with a ‘buy’ call and a target price of 15,082, implying a potential upside of as much as 45.8 percent from its current market price of 10,337.55.

Stock price trend

The stock has gained over 22 percent in the last 1 year and over 23 percent in 2023 YTD, giving positive returns in 8 of the 12 months so far. It rose the most in September, up 6 percent and shed the most in March, down 3.85 percent.

Meanwhile, the stock has lost around 2.5 percent in December so far after a 2 percent gain in November.

The stock hit its record high of 10,930 last week on December 7, 2023. It has now advanced over 28 percent from its 52-week low of 8,076.65, hit on December 26, 2022.

In the last 3 years, it has advanced 34 percent.

Auto sales

The largest passenger car manufacturer in India sold a total of 164,439 vehicles in November 2023, recording a growth of 3.4 percent from 159,044 units sold in November last year. Its total sales in the month include domestic sales of 136,667 units, sales to other OEMs of 4,822 units and exports of 22,950 units.

Meanwhile, Maruti Suzuki reported total passenger vehicle (PV) sales of 134,158 units as compared to 132,395 units last year, a rise of 1.33 percent.

Investment rationale

Industry tailwinds: The 3rd largest automobile market, India, is on the cusp of unprecedented changes with multiple factors reshaping the industry landscape. More importantly, the share of the automobile industry to GDP has moved up from 2.8 percent in FY93 to 7 percent in FY23, led by solid recovery, informed the brokerage. It noted that banking on these changes and rising demand for EVs, the key players have committed new capex. However, the price gap between an electric and a conventional vehicle is still considerable which may act as a deterrent to first-time buyers.

Given the growing HNI population and demand skewed towards large-size vehicles (SUVs with added safety features), Centrum expects the PV segment to benefit. After the COVID-led demand disruption and shortage of semiconductors, the improved supplies and stability in regulatory norms are fueling growth for the PV segment. It expects India’s PV segment to clock a volume CAGR of 6 percent over FY24-26E.

New UVs’ line-up, normalised supply chain to fuel growth: Maruti Suzuki India Limited (MSIL) successfully navigated a challenging three-year period marked by a weakened competitive position, loss of SUV market share, concerns about lagging in the electric vehicle (EV) segment, and margin pressures, said the brokerage. Through a customer-centric approach focusing on safety, comfort, and aesthetics, MSIL has experienced a positive turnaround. The brokerage attributed the company’s recovery to factors such as aggressive SUV launches, growth in hybrid/CNG vehicles, resolution of supply chain issues, moderation in commodity prices, consolidation of Suzuki Motor Gujarat (SMG) with in-house manufacturing, and an upcoming hybrid EV launch in FY25.

With a premiumisation strategy and strong coordination with Toyota, MSIL is expected to regain lost market share in the coming years. Key demand drivers include the rising income of the middle class, consumer preference for affordable SUVs (e.g., Brezza, Grand Vitara, Jimny, Fronx, Invicto), a growing High Net Worth Individual (HNI) population estimated at 1.65 million by FY27, and an accelerated adoption of EVs. The company’s focus on exports is also anticipated to contribute to sales growth. Overall, these positive trends, along with manufacturing strategy retooling, suggest that MSIL is poised to re-enter its golden era observed during FY13-18, explained the brokerage.

Multiple tailwinds for driving profitability: The brokerage also noted that recent trends indicate that MSIL may benefit from structural margin tailwinds led by, (1) a decline in precious metal/steel prices, (2) strong operating leverage led by fixed cost absorption, (3) richer product mix, (4) favorable FX, and (5) consolidation of SMG. Though these factors played well in MSIL’s 1HFY24 performance, with further price increase in Jan’24 (3-4 percent), Centrum believes margin tailwinds may continue or even improve, driven by strong festive demand and rising ASP. It estimates FY23-26E revenue/EBITDA/PAT CAGR of 16 percent/25 percent/27 percent.

Valuation

With a renewed focus on fuel-efficient models such as CNG/hybrid and a strong line-up for SUVs despite short-term weakness in the hatchback segment, the brokerage expects MSIL is all set to recapture its lost market share. In the last two years, strategic actions taken by MSIL indicate that it has regained substantial market share in UV and such a trend would continue, it added. It also highlighted that MSIL is trading at a 23 percent discount to its 10-year average PE now. 

Risks: Rising commodity prices and renewed competition in SUVs.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.

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Published: 12 Dec 2023, 05:38 PM IST

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