Improving prospects drive auto major Maruti Suzuki India's shares

Auto major seen gaining market after higher margins and volumes; valuations though may limit near-term upside

The automobile sector has started seeing volume growth, the crucial economy segment included. Maruti Suzuki India (MSIL) could be a big beneficiary as the country’s largest passenger vehicle (PV) maker has seen several favourable developments including volume recovery.

Demand for its new sports utility vehicles (SUVs) appears to be good, and the company has 4 lakh outstanding orders by April 2023, (up from 3.6 lakhs in January 2023). Siam (Society of Indian Automobile Manufacturers) estimates that passenger vehicle demand would grow by 5-7 per cent in the 2023-24 financial year (FY24) and MSIL is likely to beat the market growth.

The company, which already has around 2.25 million capacity, intends to increase it by 1 million, with a capex of Rs 8,000 crore for FY24. It expects a rise in CNG vehicle orders after the latest government administered pricing mechanism (APM) price-setting which reduced fuel costs.

The company expects improved chip supplies but there are still persistent supply issues which may impact the second half (H1) FY24 production. MSIL estimated loss of production of 38,000 units in the fourth quarter (Q4) and 46,000 in Q3 and overall 170,000 units in FY23, due to chip shortage.

Lower rare earth metals prices and lower plastics and other petrochem related costs should lead to improved Ebitda (earnings before interest, tax, depreciation and amortisation) margins despite steel prices hardening. However, there is strong competition in this space and, as and when, the new airbag mandate is implemented, there could also be additional costs. Analysts believe there's a possibility of a pure electric launch in October 2024 with industry-leading features (550 km range, 60kWh battery, fast charging etc.).

Unit volume increased 11 per cent quarter-on-quarter (QoQ) in Q4FY23. MSIL hopes to increase penetration in CNG (currently around 20 per cent) and increase its SUV market share to 25 per cent in FY24 from 11 per cent in FY23 -- it saw SUV market share jump in Q4FY23 to 18 per cent. Loss of market share in overall PVs has pulled MSIL down to around 41 per cent but share is expected to rebound in FY24.

The Q4FY23 results showed higher operating revenues of Rs 32,048 crore, (up 20 per cent year-on-year or YoY) and up 10 per cent QoQ). But raw material costs were up 19 per cent YoY and 11 per cent QoQ. Ebitda rose 38 per cent to Rs 3,350 crore but the margin was almost flat at 9.1 per cent. Profit after tax (PAT) was at Rs 2,624 crore, up 43 per cent YoY and up 12 per cent QoQ.

The stock has gained steadily through the last 12 months, and hit a 52-week high of Rs 9,770 on Tuesday on the NSE. It has seen quite a lot of foreign portfolio investor (FPI) buying in May. It is up by 13 per cent in the last 3 months and by 24 per cent in the last year.

Looking forward, most industry watchers expect MSIL to regain lost market share in FY24 and to raise realisations as average selling price should rise as its new SUV launches gain traction.

The average 12-month valuation seems to be in the range between Rs 10,100 and Rs  10,300 with some outliers seeing price targets of up to Rs 11,500. According to Bloomberg, only 5 out of 45 analysts polled after results on April 26 have a ‘sell’ rating on the stock; 6 are ‘neutral/hold’ while the remaining 34 have ‘buy/accumulate/add/outperform’ rating. Their average target price is Rs 10,110.