Buy This Large-Cap Automobile Stock For 27% Upside, Return of Product Lifecycle To Drive Market Share

A leading brokerage firm, the Motilal Oswal Financial Services, in its report, published on 14th June 2022, has recommended investors buy the stocks of Maruti Suzuki India Ltd for a target price of Rs 10,000/share. Maruti Suzuki's product pipeline has just kick-started with upgrades of key models and it is on the cusp of launching new models. While the return of product lifecycle will drive market share recovery (~600bp by end-FY24E), strong demand, improving supplies and stable commodity prices will propel EBIT margin improvement of ~550bp for Maruti Suzuki.

CMP, Target Price, Returns, Performance, 52-Week Low & High

Today, the stock opened at Rs 7,816/share, while the previous close was Rs 7,811/share. The Current Market Price (CMP) of the stock is Rs 7,896/share. The 52-week low is Rs 6,536.55/share, and the 52-week high is Rs 9,050/share. The stock is currently trading at nearly Rs 1,359.45/share above the 52-week low level, and Rs 1,154/share below its 52 week high level.

Over the last 5 years, the stock has performed average on the stock market in terms of returns. It has given the highest returns on investment in 3 years. The stock has given 0.03% of positive returns in 1 year, 9.99% in 1 month, 6.76% in 3 months, 8.83% in 1 year, 15.77% in 3 years and 6.27% in 5 years, respectively.

Considering the given target price by the brokerage and the CMP of the stock, the stock has huge potential to climb nearly 27% upside in 12 months.

Product lifecycle has just kick-started after a gap of almost three years

After a gap of almost three years, Maruti Suzuki's product pipeline has just kickstarted with an exciting line-up of launches over the next 2-2.5 years. It has launched upgraded Celerio, and mid-cycle refresh of Baleno as well as XL6. Going forward, Maruti Suzuki would be launching: new models (four SUVs), platform upgrade (Alto) and mid-cycle refresh (Brezza). Four new SUV brands are lined up for launch over the next couple of years to plug in the gaps in its portfolio. Based on our channel checks, Maruti Suzuki is planning to replicate its highly successful product laddering strategy in the SUV segment, thereby giving customers an option of an SUV at every price point. While the SUV based on Baleno platform will provide product laddering between Brezza and S-Cross, the SUV co-developed with Toyota will open up the UV1 segment (currently dominated by Hyundai Creta and Kia Seltos) and Jimny would compete in the niche segment of Thar. Further, it plans to launch a mid-size MPV sitting in between best-sellers such as Ertiga and Toyota's Innova. Besides, Alto would get its much-needed complete platform upgrade after a gap of 10 years. This would be the second platform upgrade after Celerio. Maruti Suzuki is also launching the mid-cycle refresh of Brezza (likely on 30th Jun'22), after the recent mid-cycle refreshes of Baleno and XL6.

Demand remains good, though supply issues crop up intermittently

Demand for PVs remains robust with healthy traction in inquiries and bookings. In the domestic market, the unfulfilled order book has increased to ~295k units as of May'22 (of which 130k was CNG) and has consistently remained above ~200k units since 3QFY21 due to healthy demand and chip shortages. Maruti Suzuki has also been seeing substantial traction in exports, led by its three-pronged approach to: a) expand the product portfolio, b) expand the network in existing markets, and c) add new markets. It is focused on implementing the best practices of the India business in these markets. Additionally, the Toyota partnership is supporting the company business in Africa and Latin America. As a result, Maruti Suzuki's export volumes have consistently averaged above 20,000/ month since Jul'21 (v/s <10,000/month earlier). The semiconductor shortage has been gradually improving, though it crops up intermittently like in Mar-Apr'22 before production recovering in May'22.

 

EBIT margin: Headwinds stabilizing, if not receding

Maruti Suzuki's profitability has been adversely impacted in the last three years by: a) a weak product lifecycle, b) unprecedented commodity cost inflation in base commodities and precious metals, and c) multiple headwinds to volumes, resulting in an operating deleverage. This has resulted in a sharp erosion in its gross margin (~610bp) and EBIT margin (~570bp) over FY19-FY22. However, stable commodity cost during 4QFY22 and benefit of pricing action were reflected in gross margin and EBIT improvement of 180bp and 270bp QoQ in 4QFY22, respectively. Improving supplies and product mix, and stable commodity prices would drive an EBIT margin expansion of 550bp to 8.8% over FY22-24E. Our estimates do not factor in any benefit from: 1) the product mix improvement led by new product launches, 2) ~80bp gain from the recent decline in spot commodity cost (as a % of sales) to 15.8% (from 16.6% in 4QFY22) and ~100bp benefit of favorable JPYINR movement (spot v/s FY22 average). Lastly, Maruti Suzuki had witnessed an adverse impact of declining interest rates on its treasury, as reflected in almost halving of other income over FY20-22 or the effective yield on treasury plunging to 4.3% in FY22 from 9.3% in FY20. While we are estimating 5% yield in FY24, if this goes up 2pp, it will drive almost ~Rs 10b increase in other income (on treasury of over Rs 500b) or ~8% upgrade in our FY24E EPS.

Motilal Oswal recommends buy for a Target Price of Rs 10,000/share

Strong demand, improving chip supplies, moderating commodity inflation and favorable Fx would support margin recovery. Robust demand coupled with strong recoveries in both market share (+600bp) and margins (+550bp) over FY22-24E, would drive 66% CAGR in EPS. The stock trades at 34.1x/22x FY23E/FY24E consolidated EPS. We maintain our BUY rating with a Target Price of Rs 10,000 (premised on 27x Jun'24E consolidated EPS).

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.