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Passenger vehicles industry on the highway to recovery as major headwinds have passed

The passenger vehicles industry in India saw a de-growth of 17.9% in sales in FY20, for the first time in the last 5 years. The industry faced multiple obstacles in the form of (a) credit crunch due to the NBFC crisis, (b) increase in rejection rates for loan applications, (c) introduction of the BSVI emission and safety norms, leading to significant price increase of vehicles, especially the entry level segment and (d) the weak economic scenario, leaving people with less disposable incomes. On top of these issues the coronavirus pandemic hit the world in March 2020, bringing industries to a standstill. But as things started opening up and people started going back to work, there was a newfound demand for private vehicles as people were apprehensive of public transport and shared mobility. The BSVI norms have been better understood and the price hikes have been accepted, leading to a demand recovery in the industry.

Best positioned to benefit from the demand recovery

Maruti Suzuki is India’s leading car manufacturer in the PV segment, with a market share of 51% in FY20. The company has a diverse portfolio of vehicles, especially in the entry-level segment. MSIL’s cars are highly reliable, have good fuel efficiency, have low service and maintenance costs and have a good resale value. The company also has an unmatched sales and service network with wide availability of spares. We believe as most buyers are first time purchasers and some would downtrade due to cost crunch, MSIL is best positioned to benefit from this demand as people look for affordable cars.

Strategic moves to keep up with new industry trends

The company has collaborated with Toyota for hybrid and electrification technology leveraging Toyota’s know how and MSIL’s manufacturing expertise, launched “Maruti Suzuki Subscribe” leasing program to keep up with the industry and discontinued diesel powertrains as they became unaffordable with BSVI for the entry level segment. Measures like these keeps the company in a position to optimize its operations.

OUTLOOK & VALUATION

We have forecasted a 10.7% CAGR growth in revenues over FY20-23E. We expect FY23E revenue to be Rs. 102,537 Cr and Net Income to be Rs. 9,015 Cr, translating to a net margin of 8.8% yielding an EPS of Rs. 298.5. we arrive at a target price of Rs. 9,553 (32x FY23E EPS) which is an upside of ~31% from the current market price of Rs. 7,300. we initiate coverage on Maruti Suzuki India Ltd with a BUY rating over an investment horizon of 18-24 months.

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