According to a recent report released by Morgan’s trading arm, India's car market leader is best positioned when demand picks up.
Maruti is the only company from India to find a place in Morgan Stanley’s list of global longs (stock with potential upside). The firm believes the stock is better value for money than others and has a upside as high as 73 per cent.
A slowdown in the economy has hit demand and led to a fall in overall consumption in an auto market which till recently was one of the fastest growing in the world.
Passenger vehicle (PV) sales in India skidded 16 per cent to 1.8 million units in the first eight months of the current fiscal from 2.2 million in the corresponding period a year ago, according to the Society of Indian Automobile Manufacturers (SIAM).
This is because companies dispatched lesser units to align production to demand. Maruti, which accounts for half of all passenger vehicle sales, saw a year-on-year sales drop of 12.2 per cent in the year that ended in December 2019, the worst in almost a decade.
“The industry has been through a long down cycle and is showing signs of a turn in growth,” said the report.
It pointed out that the government’s move to cut corporate tax rates will see capex outlook improve and GDP growth pick up, benefitting consumption.
“With its strong market share and large distribution presence, Maruti could be a key beneficiary of the upturn in demand.
And, it should continue to gain share into the BS-VI transition and do well during transition into CAFE (Corporate Average Fuel Efficiency) norms in 2022,” it said.
But not everyone agrees. “Given the competition from newer entrants like KIA Motors and MG Motors, maintaining market share will not be easy for Maruti. It is already showing in the recent drop in market share,” said Bharat Giani, analyst at Sharekhan.
“The stock is already trading at a premium valuation and we see limited scope of an upside from the current levels,” he added.
The brokerage has a hold rating with a target price of Rs 7,500. Maruti’s market share in the PV segment dropped to 50.05 per cent in the months between April and November from 51.80 per cent in the same period a year ago.
Morgan Stanley believes the Suzuki-Toyota alliance bodes well for Maruti as it will enable Suzuki to launch an electric car with high-localisation levels. This, in turn, will ensure high localisation, which could help ensure better profitability and strong market share for Maruti.
The trading arm of Morgan has built in a 3.5 per cent volume compound annual growth rate (CAGR) and 8.7 per cent CAGR over F2019-22e. The team projects earnings before interest and taxes (EBIT) margin of 10.2 per cent in the same period.
It is based on the assumption of a stronger-than-expected pent-up demand in the industry. The catalysts include launches such as S Presso and petrol variant of the Brezza.
Maruti’s stocks have outperformed the broader Sensex and auto index. In the year-to-date period, it has gained 6.03 per cent to Rs 7,074. The auto index dropped 4.67 per cent in the same period.