Sharekhan maintains buy rating on Maruti Suzuki with price target of Rs 9000

Maruti Suzuki reported revenues in-line with estimates but missed on operating performance on back of unfavourable product mix and rise in the prices of key raw materials. Maruti’s Net revenue grew 13.1% yoy at Rs 23458 cr in Q3 FY21, driven by 13.0% growth in domestic volumes and 20.6% growth in exports, while the realization remained flat. Sharekhan maintains buy rating with price target of Rs 9000.

Maruti EBITDA margins declined 66 bps yoy and 83 bps qoq at 9.5%, leading to slower EBITDA growth of 5.9% yoy and 15.1% qoq at Rs 2226 cr. The reported EBITDA was below expectations due to unfavourable product mix, rise in raw material costs and adverse forex fluctuations. Despite the adverse situations, the EBITDA margin remained firm for Maruti, aided by improved capacity utilisation and lower marketing expenses. However, the company reported net profit of Rs 1941 cr, a robust growth of 24.1% yoy and 41.5% qoq in Q3 FY21, led by higher other income. Other income for the quarter stood at Rs 994 cr, registering a growth of 26.7% yoy and 64.9% qoq.

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The management of Maruti Suzuki were cautiously optimistic on the demand outlook for domestic as well as export markets. The company has witnessed strong demand from rural and semi-urban areas, where Maruti’s distribution network and product portfolio fits aptly. The improving income levels of individuals, firms and corporates after recovery from Covid-19 pandemic is likely to keep the demand strong in the medium term.

Sharekhan expects FY2022 to be a stronger quarter for Maruti Suzuki, driven by strong volume growth. The volume growth will be aided by new product launches, quick economic recovery, upside from COVID-19 vaccines, and low base. 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 49% and 19.5% in FY2022E and FY2023E, respectively, driven by 21.9% revenue CAGR (FY2021E-FY2023E) and 380 bps improvement in EBITDA margin. Moreover, core earnings (excluding earnings from the non core business) are expected to post a 67.8% CAGR during FY2021E-FY2023E. Sharekhan expects Maruti Suzuki RoCE to improve to 18.4% in FY2023E from 13.6% in FY20.

Maruti Suzuki Key Risks:

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