Stock corner: Value Maruti Suzuki at slight premium, target price Rs 6,322

Maruti Suzuki India (MSIL) reported a Q2FY20 Ebitda margin of 9.5% (Nomura: 8.5%, Consensus: 9.3%), helped by a 30 bps benefit to gross margin (Our estimate: 50 bps fall). The company said that the cost reduction helped margins. A fall in commodity prices and better inventory absorption may have also helped gross margins.

MSIL’s retail sales were slightly positive during the festive period, which is a good sign. However, the management said it needs to see if the turnaround sustains as the average `26,000/vehicle discount (was ~`17,000) helped demand. Inventory of 30-32 days at end-Q2 was stable (50% of this is BS-IV). Over the past 5-10 years, while the PV industry CAGR was only 6-7%, MSIL outperformed, helped by a strong model cycle and plugging of portfolio gaps. However, it may be more difficult to do so over FY20-22 as most of the white space is filled and given lack of diesel options under BS VI initially.

We maintain FY20/21F volume growth of -16%/+10%. Our Ebitda margin estimates for FY20-21 move up to 10.3%/11.2% (vs 9.6%/10.9% earlier) as we factor in stronger results. However, given that we estimate utilisation at 77% even in FY22F (vs 90% in FY19), we estimate FY22 margins will rise to ~12.6%.

Also, we expect competitive intensity in the small SUV/MPV segment to increase. Our EPS estimates over FY20-22 rise by 16%/6%/2% as we factor in higher other income also. We believe Street expectations are too high; our FY20-22 Ebitda estimates are 15%/17%/5% below consensus. We value MSIL at 12x FY22F EV-Ebitda (vs PE earlier), at a slight premium to its long-term average of 10-11x (to account for corporate tax cuts), discounted back to Sep-21F to arrive at our TP of `6,322 (implied 22x P/E). We prefer Ashok Leyland (‘buy’) given what we see as attractive valuations.

Maruti Suzuki India Limited