Maruti Suzuki share price: Jefferies sees it at Rs 12000 - Rs 16590 - whopping 50-110% upside

Maruti Suzuki share price: Jefferies find risk reward favourable and retain Buy on Maruti. The sharp 22% fall in PV demand over FY19-21E has created a favourable base for double digit CAGR in coming years. If one assumes demand recovers to 4.5-7.0% CAGR trend line over FY19-25E (1 - 1.7x GDP), passenger vehicles ( PVs) need to rise at a strong 14-19% CAGR next four years. At stable market share and 14% EBITDA margin, Maruti's FY25 EPS can rise to Rs 480 – Rs 553 in these scenarios, and Jefferies sees a fair value of Rs 12000 – Rs 16590/sh at 25-30x PE, implying 50-110% upside in three years.

An abnormal cyclical trough:

India's passenger vehicle (PV) industry has witnessed its worst downturn in four decades over FY20-21E, due to the combined impact of a weakening economy, Covid and regulatory cost push. Jefferies expect FY21 industry volumes to be 22% below FY19, creating an exceptional cyclical trough.

Double digit CAGR needed to catch up to trend growth:

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The PV industry needs to rise at a strong double digit CAGR in coming years to recover to even a modest trend line growth. PVs grew at a healthy 10% CAGR over FY00-10 (1.6x of GDP); however, growth rate contracted to 6% CAGR in FY10-19 (0.9x of GDP), which has somewhat diminished the confidence in the industry growth outlook. Even if one assumes the industry would recover to a 1x GDP trend line, i.e. 4.5% CAGR, over FY19-25E, volumes need to grow at a strong 14% CAGR in the next four years.

India's low PV penetration offers potential for industry to grow ahead of GDP, posing upside risk to the above scenario. The average age of vehicle parc is also at a multi-decade, which should trigger replacement demand and boost growth. For PVs to catch up to 6% and 7.5% CAGR trend lines over FY19-25 (1.3-1.7x GDP), volumes would need to grow at 16% and 19% CAGR respectively over FY21-25.

Buy the recovery:

In the first scenario of 4.5% CAGR over FY19-25E, Jefferies saw the PV industry reaching 4.4mn volumes by FY25. Assuming Maruti Suzuki maintains its 50% market share and generates 14% EBITDA margin, Jefferies sees FY25 EPS of Rs 480/sh and fair value of Rs 12.0-14.4 K at 25-30x PE. If the industry catches up to a stronger 6-7.5% CAGR, Jefferies sees FY25 EPS of Rs 516 - Rs 553 and fair value of Rs12.9-16.6K.