Maruti Share Price: Sharekhan says All is Well, retains buy rating with price target of Rs 9000

Sharekhan retains Buy rating on Maruti Suzuki with a revised price target of Rs 9000. Maruti Suzuki Limited is witnessing strong recovery in sales volumes and is likely to have flat yoy sales volume growth in FY2021E, despite a 36.6% yoy decline in first half of FY21. Sharekhan expects Q3 FY21 to be a strong quarter for Maruti, with earnings expected to grow 35% yoy at Rs 2112 cr, driven by 13.4% growth in revenue and 135 bps yoy at 11.5%. Demand in the passenger vehicle (PV) segment remains buoyant even after the festive season.

Sharekhan expects Maruti to register strong volume growth going forward, driven by new product launches, quick economic recovery, upside from COVID-19 vaccines, and low base. Despite intense competition in the PV segment, Sharekhan believes Maruti will be able to sustain its dominant market share, aided by its strong product portfolio and position, brand appeal, and ability to launch new models frequently. Moreover, the company is likely to be the beneficiary of buoyant demand in the PV segment, driven by rising demand in tier 2 and 3 cities and rural areas.

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Maruti’s strongest distribution network in the segment and rural penetration are likely to drive strong revenue growth going forward. Maruti’s volumes are expected to recover from FY2022 with expectations of strong double-digit growth, aided by robust exports as well. Maruti would benefit from operating leverage, driven by robust volume growth. Sharekhan expects Maruti’s earnings to grow strongly by 44.5% and 19.5% in FY2022E and FY2023E, respectively, driven by 20.7% revenue CAGR (FY2021E-FY2023E) and 300 bps improvement in EBITDA margin.

In addition, the company would continue to focus on cost-control initiatives such as increasing localisation levels and improvement in operational efficiencies. Sharekhan expects Maruti’s EBITDA margin to retract back to more than 12% by FY2023. As a result, Sharekhan expects RoCE to improve to 18.3% in FY2023E from 13.6% in FY2020. Moreover, core earnings (excluding earnings from the non-core business) are expected to post a 60.1% CAGR during FY2021E-FY2023E.

Key Risks:

Key raw-material prices have surged steeply since the past six months in the range of 30%-50%. Maruti has taken price hikes to mitigate the impact of high input costs this month. However, if raw material prices continue to rise in the same pace in the near term, the company may not be able to pass on the cost to customers and profitability can get impacted.