Significantly, CLSA maintains a sell rating on Maruti Suzuki; raise target price to Rs 6300 from Rs 5675. CLSA factors Maruti’s volume outperformance in their forecasts and increases their FY21-23 EPS by 5-10%. Maruti expects strong festival retails driven upswing in rural demand for small cars and a relative ease of finance availability. Nomura maintains a neutral rating on Maruti Suzuki with a target price of Rs 7163. Nomura says Maruti, given its strong reach and wide product portfolio, should be able to grow in line with the Industry. 

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Profitability improvement lags peers

Strong volume growth but a weak mix

Maruti’s Q2 FY21 operating results were in line with consensus forecasts. While its volume growth was +16% YoY in Q2, its EBITDA / vehicle improvement (+4% YoY) lagged other OEMs. The key positive from the result is the commentary around festival retails (+28% YoY in phase one), which reflects continued momentum in the near term. CLSA factors Maruti’s volume outperformance in their forecasts and increases their FY21-23 EPS by 5-10%. However, CLSA believes that Maruti’s margin trajectory may not be in line with volumes due to a weaker mix, a tapering model cycle and a resurgence of new launches by the competition.

Management gearing up for strong demand in the near term

Maruti expects strong festival retails driven an upswing in rural demand for small cars and a relative ease of finance availability (vs 2Ws). However, management clarified that the outlook beyond Q3 FY21 remains uncertain. The share of first time buyers has increased to 48% vs 43% YoY.

Valuation premium already factors in potential growth outperformance

Maruti has been trading at a significant premium to its 2W peers like Hero despite similar earnings CAGR over the past 5 to 10 years. Maruti’s valuations have been comparable to TVS even though the latter’s earnings have materially outperformed. The current valuation premium of Maruti reflects higher consensus earnings expectations over the next two to three years. CLSA believes that Maruti’s consensus forecasts are factoring in mean reversion of volumes and margins by FY23. Hero and TVS’ forecasts factor in more conservative outcomes.
Nomura highlights Q2 FY21 EBITDA margin stood at 10.3% was below estimates by 100 bps. Other expenses / sales were 100 bps higher than estimates. ASPs (Average Selling price) dropped 6% YoY, impacted by shift of mix towards entry segment cars (in line).

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Commentary:

There is strong pent up demand with sales for the initial 10 days of festive season (Navratra) up  25% y-y . Rural growth in Q2 (+10%) remained faster than Urban (flat). Demand outlook till the end of the year remains strong but will depend on economic recovery after that. First time buyers share went up to 48% in Q2 FY21 (43% in Q2 FY20). Financing share is back to 80%. There is 5-6% contribution coming from leasing schemes. Commodity headwinds remain and Maruti will try to take price hikes based on demand scenario.

Near term demand pull back is stronger, backed by pent up and personal mobility demand. However, Nomura expects usage of public transportation / shared mobility could normalize over the next 2-3 years. Thus, longer-term growth will need to be driven by economic drivers. Maruti, given its strong reach and wide product portfolio, should be able to grow in line with the Industry. However, the ASPs and EBITDA margins may remain under pressure till new SUVs models get launched as there is value market share loss to Hyundai and Kia. Nomura expects further drop in gross margins in the near term due to 100 bps QoQ higher RM costs and 100 bps higher discounts in Q3 FY21.