Brokerages upgrade estimates on Maruti on new launches, positive guidance

An expected improvement in the availability of semiconductors and robust demand outlook in the passenger vehicle market is also driving the upgrades

A positive guidance by Maruti Suzuki India’s management after better-than-expected earnings in the third quarter of the financial year 2021-22 (Q3FY22) and a strong pipeline of new launches, coupled with easing commodity prices, have prompted brokerages to upgrade their earnings estimate and volume outlook for the company.

An expected improvement in the availability of semiconductors and robust demand outlook in the passenger vehicle (PV) market is also driving the upgrades. Maruti expects India’s PV market to grow 7-8 per cent, in line with the economic growth.

In a post earnings report, Nitin Mangat and Sagar Sahu, analysts from Jefferies India, wrote that they see “better times for the company ahead” given strong demand recovery, easing chip constraints, input cost pressures behind, and a product cycle likely around the corner. “MSIL’s commentary was positive on all the above parameters,” they wrote. The brokerage expects earnings per share (EPS) to treble to Rs 409 over FY22-24. It’s 19-30 per cent above consensus.

Jefferies has upgraded the target price of the stock to R s 10,500 apiece from the earlier Rs 9,250. It expects the company to clock high double-digit volume growth over the next two years on the back of new model launches in the SUV segment.

It also expects Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins to expand as price increases announced by the company begin to outpace the incremental cost pressures. For the full year that ends in March, Maruti’s margins are likely to crimp to 7 per cent, but the firm is likely to maintain an uptrend for the next two years to 12-12.3 per cent, said the report.

On Tuesday, the maker of Wagon R and Baleno models reported a net profit of Rs 1,011 crore, down 48 per cent year-on-year, beating analysts’ estimates. The revenue from the sales of cars during the three-month period stood at Rs 22,187 crore, against Rs 22,236 crore last year.

Maruti has an order backlog of 264,000 units because of the shortage of chips. It retailed 403,00 units in Q3, against 385,000 units in Q2. The supply of semiconductors is improving gradually and this will boost Q4 production further. However, the larger picture remains uncertain. It lost 90,000 volumes in Q3 due to chip shortage.

Raw material cost pressures are starting to ease as the rise in steel prices was offset by a decline in precious metals. However, price hikes (around 1.9 per cent in September) and lower discounts (a reduction of around 60 basis points quarter-on-quarter) drove the 50 basis point sequential improvement in gross margin. If commodity prices stabilise, Maruti expects a further reduction in raw material costs in Q4FY22.

Encouraged by a positive outlook, other brokerages are also raising their targets. “In view of the strong products basket, healthy balance sheet, and strong return ratios, we expect the stock to enjoy premium valuation. Therefore, we increase our target price to earnings multiple from 25x to 27x (its historical up-cycle multiple),” wrote Mitul Shah, analyst at Reliance Securities. The brokerage has increased the target price to Rs 9,700 apiece from the earlier Rs 8,751, valuing the stock at a revised price-to-equity (P/E) multiple of 27x on expected FY24 earnings.

“Maruti could emerge as the biggest beneficiary of a demand recovery in the post-Covid period, considering its stronghold in the entry-level segment and a favourable product lifecycle,” wrote Jinesh Shah, analyst at Motilal Oswal.

The brokerage has raised its expected FY22 and FY23 EPS by 21 per cent and 6 per cent, respectively, factoring in higher realisations and lower depreciation.