Maintain BUY on Maruti Suzuki - Festive cheer! - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Maruti reported double-digit margin (10.3%) in 2Q, which was 80bps higher YoY due to improved operating leverage. The festive season has received an encouraging response with retails up 27% YoY to 96,700 units over the Navratri period. Maruti continues to benefit from its dominance in the entry-level segment, with the share of first-time buyers increasing to 48% (from 43% YoY). System inventories remain comfortably below the normalised level of 30 days. We reiterate Maruti as our preferred pick in the auto sector. Our estimates largely remain unchanged. Maintain BUY with a target price of Rs 8,145 (based on 27x Sep-22 EPS (~15% premium to the long-term historic trading multiple). Key risk: an increase in competitive intensity.

2QFY21 financials: Revenue grew 10.4% YoY to Rs 187bn (while volumes grew 16% to 393k units, realisations declined 5% YoY to Rs 476k due to higher share of entry-level cars). EBITDA margin at 10.3% expanded 85bps YoY (vs. loss of Rs 8.6bn QoQ) due to improved operating leverage as the RM expense ratio declined 120bp YoY. Other income at Rs 6bn was down ~35% YoY due to lower MTM gains. PAT grew by 1% YoY to Rs 13.7bn (vs a loss of Rs 2.5bn QoQ).

Call takeaways: (1) Strong start to the festive season: In the initial 10 days of the festive period, Maruti retailed 96.7k units vs 76k YoY. The production is running at almost 100% utilisation levels in October. Discounts at Rs 17,300 in 2QFY20 were lower (vs. Rs 25,000+ levels YoY). (2) Rural markets are leading the recovery due to good monsoons, higher crop production and limited impact of COVID. Share of rural has risen to 41% vs 38.5% YoY. (3) Lower diesel mix to benefit Maruti: The proportion of diesel variants in the industry reduced further to 17% in 2QFY21 (vs 20.6% QoQ), which is benefiting Maruti as it has exited this segment. For the passenger car segment, diesel is down to just 1% of sales. Mid-end/high-end SUVs are primarily diesel-powered. (4) Others: Demand in top-10 cities (31% of demand vs 36% in FY20) is gradually expected to improve as COVID cases level off. The share of financing remains constant at 80% of retails.

Shares of MARUTI SUZUKI INDIA LTD. was last trading in BSE at Rs.6940 as compared to the previous close of Rs. 7114. The total number of shares traded during the day was 37995 in over 5615 trades.

The stock hit an intraday high of Rs. 7106.5 and intraday low of 6882.9. The net turnover during the day was Rs. 265037037.

Source : Equity Bulls

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