Reduce Maruti Suzuki India; target of Rs 6520: Dolat Capital

Dolat Capital's research report on Maruti Suzuki India

Maruti Suzuki’s (MSIL) Q1FY21 result outcome was disappointing with significantly higher EBITDA loss of Rs.8.6bn (vs estimated loss of Rs 2.62bn) due to higher discounts (Rs. 25,000/vehicle) and negative operating leverage. While PVs demand is back to 85-90% of pre-COVID level, the management believes broad-based recovery is still elusive as it is difficult to predict if the current demand is pent up in nature. Majority of customers are first-time buyers for entry segment cars. Currently, replacement demand is weak as buyers are postponing discretionary purchases. While macro level deterioration, supply chain disruption (current production is 4,000 vehicle/day) and falling discretionary sentiment remain overhangs, the company’s strong rural presence (~40% of sales) and low system inventory (85,000 vehicle/25 days), provides near term hope for volume recovery in festive season. We believe MSIL is best positioned to tap the domestic PV recovery with (1) product positioning (continued market dominance in the entry-level car segment) (2) strong rural presence and 3) network strength. Management is also aggressively working towards reducing fixed cost, model development cost and increase localization Moreover, the strong balance sheet will help tide over the COVID-led disruption.

Outlook

We roll forward our estimates to 24xFY23EPS, and increase the TP to Rs 6520. However, we change our rating from Accumulate to Reduce, owing to the constraint of rich valuations (27/23x for FY22/23E EPS, 20% premium over its 5-year historical multiple).

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