Maruti Suzuki share price: Kotak maintains SELL rating

Kotak Institutional Equities says that Maruti indicated that demand has held up well as far as fresh bookings are concerned. However, retail demand has been impacted in several states due to restrictions amid the Covid crisis (35% of monthly sales are impacted due to these restrictions). Also, Maruti highlighted that the demand trend might get impacted negatively if the Covid situation persists for longer. Maruti indicated that channel inventory was 32,000 units at start of April and currently the channel inventory is around 85,000-90,000 units (normal levels of 135,000-140,000 units). Maruti has an order backlog of 200,000 units. In terms of supply chain, Maruti highlighted that they are operating at full capacity and not facing any issues currently.

Kotak Institutional Equities said that Maruti reported 4QFY21 EBITDA of Rs19.9 bn (+29% yoy), 12% below our expectations due to higher input costs and other expenses. Volume growth outlook remains strong given a strong order backlog, lower inventory levels and a favorable base.

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However, Kotak maintains SELL rating on Maruti with price target of Rs 5600 as they remain concerned due to:

(1) market share loss in the high-margin SUV segment
(2) Raw Material headwinds
(3) expensive valuations

Kotak have cut their FY2022-23E EPS estimates by 7-11% on:

(1)    lower EBITDA margin assumptions
(2)    lower other income assumptions

Kotak expects Maruti FY2022E volumes to increase by 33% on a yoy basis due to

(1)    higher order backlog (200,000 units)
(2)    lower channel inventory (85-90,000 units versus normal levels of 135-140,000 units)
(3)    a favorable base

Overall, Kotak expects EBITDA per vehicle to improve to Rs 50,864 in FY2023E from Rs 36,665 in FY2021 led by operating leverage benefits and cost-cutting initiatives. This would be partly offset by a weaker product mix (hatchback segment makes lower margins) and Raw Material headwinds.

Kotak would like to highlight that the company clocked in EBITDA per vehicle of Rs 65000 in FY2017 and FY2018 led by a richer product mix (higher mix of Brezza and Baleno that were sold at no discounts). Also, Raw Material headwinds (especially precious metals and steel) will put pressure on gross margins as the company is not able to completely pass through the impact of the same. Kotak maintains SELL rating and revised target to Face value to Rs 5600 (from Rs 5700). Kotak value core earnings at 25X March 2023E EPS (unchanged) while cash per share is Rs 1484.