Maruti Suzuki India (MARUTI): Slower pace of retracement sets stage for next leg of up move

Maruti Suzuki is the market leader in the Indian PV space, commanding 51% market share (domestic sales basis) as of FY20. Further, it is the market leader in all individual PV sub segments i.e. passenger cars (PC), utility vehicles (UV) and vans. The company has a host of popular models in its portfolio such as Alto, Swift, Wagon R, Ciaz, Dzire and Baleno in PC; Ertiga, Brezza and S-Cross in UV and Eeco in vans.

Contrary to ICICI Securities expectations, the PV space has rebounded faster than the 2-Wheeler segment after the nationwide unlock programme. The segment, as a whole, grew 10% YoY at the retail level in September following months of consecutive rapid MoM improvement. ICICI Securities believes that while some of the earlier volume offtake would have been on account of pent up demand post lifting of lockdown restrictions, there is also an element of increased preference for personal mobility in the wake of the pandemic (concerns around public transport). Alongside these factors, efforts by OEMs centred around digital marketing and increased financing options (tie ups with banks, NBFCs for multiple offerings on beneficial terms) have helped the segment post a quicker than expected turnaround.

On its part, Maruti Suzuki has led the charge, with robust retail offtake in May-September helping maintain retail market share at 50%. The industry wide move towards smaller cars suits Maruti given its dominance in the entry level segment. PV festive demand for Maruti has been healthy, as per reports. Recent growth momentum is cause for encouragement but volume sustainability post November would need to be monitored amid an element of channel restocking carried out in September.

Another factor to watch, going forward, would be its UV volumes, which are facing increased competitive intensity from new launches by rivals and entry of newer players in India. The company’s overall production capacity is set to be increased by 2.5 lakh units per annum from FY22E onwards to 22.5 lakh units per annum as the third line of Suzuki Motors Gujarat in Hansalpur, Gujarat has been set up.
In the long run, the company is well placed to capitalise on rising penetration of PVs in India, accompanied by a rise in income levels. ICICI Securities builds in 3.9% volume CAGR, 2.6% revenue CAGR and 7.2% PAT CAGR for Maruti Suzuki over FY20-23E. On the balance sheet front, Maruti is a net debt free company with surplus cash amounting to Rs 35000 cr as of FY20 (16% of MCap). On the core return ratios matrix i.e. RoIC, Maruti is a capital efficient player with RoIC>25% in normal times. At the CMP, the company currently trades at 30x P/E on FY23E EPS of Rs 230.6/share.

Technical Analysis on Maruti:

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The share price has formed a higher base of Rs 7350-6270 after witnessing the strongest rally (82% off March lows, since December 2017. Currently, the stock is on the verge of resolving out of ongoing consolidation, which would open the doors for the next leg of the move. Hence, this offers a fresh entry opportunity. Key point to highlight is that the stock has been sustaining above its 10 weeks EMA since May 2020.

Currently, it has formed a higher base above it, indicating inherent strength. Structurally, the stock witnessed a slower pace of retracement as over the past 10 weeks it has merely retraced 61.8% of the preceding eight week’s rally at Rs 5750-7350, at 6361, indicating healthy consolidation that has set the stage for acceleration of upward momentum. Aforementioned technical evidence suggests the ongoing base formation has paved the way for the stock to head towards Rs 7810 in coming months as it is 138.2% external retracement of last leg of decline to Rs 7350-6270, at Rs 7762.