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Margin decline to continue, valuations remain pricey...

Maruti Suzuki (MSIL) reported a soft Q4FY21 performance. Net sales were at | 24,024 crore, up 32% YoY tracking 27.8% YoY rise in volumes to 4.92 lakh units and 4% rise in ASPs to | 4.66 lakh/unit. Volumes were flattish QoQ. Q4FY21 margins slipped 120 bps QoQ to 8.3% on 135 bps gross margin contraction. Consequent PAT for Q4FY21 was at | 1,166 crore, down 9.7% YoY, impacted by sharply lower other income due to MTM loss on invested surplus. The company declared a dividend of | 45/share for FY21.

MSIL underperforms in FY21; outlook remains promising!

FY21 PV industry volume offtake was better than initially expected, with the industry clocking mere 2.2% YoY decline domestically – a credible performance given that the first six weeks were lost completely due to nationwide lockdown. Further, industry product mix improved considerably, with UV volumes growing 12.1% YoY, taking UV as a proportion of total PV sales domestically to 39% vs. 34% in FY20. Against this backdrop, however, market leader MSIL underperformed on both counts. Total domestic dispatches for the year were down 8.5% YoY, accompanied by 2.6% decline in UV sales. However, the latter’s share in overall mix rose slightly to 17.7%.

MSIL’s UV market share fell 330 bps YoY to 21.6%, highlighting the sharp increase in competitive intensity. Encouragingly, however, PV retail demand remains healthy, as indicated by low industry channel inventory levels of ~10-15 days. Favourable base of FY21, increased preference for personal mobility and pent-up demand are expected to ensure strong double digit CAGR industry growth over FY21-23E, although ongoing semiconductor shortage issues and pandemic resurgence would weigh over next few months. MSIL is slated to benefit given its wide portfolio, large distribution footprint and price leadership. For MSIL, product mix movement remains a key monitorable. We build 15.9% volume, 19.7% sales CAGR in FY21P-23E.

Commodity prices inching up, margin pressures set to stay

Steep increase in prices of key raw materials (steel and other metals, rubber, plastics) has affected the automotive world over the past several months. For MSIL, gross margins continued to erode in Q4FY21 to ~26% (vs. ~30% as of Q4FY20). The company has already undertaken two price hikes, thus far, in 2021 in order to combat commodity cost inflation, with supportive demand scenario providing relief. Product mix changes would also impact blended profitability, going ahead. Given the challenges, a return to doubledigit operating margins remains some time away, in our view.

Valuation & Outlook

For MSIL, we build PAT CAGR of 26.8% in FY21P-23E. We retain our cautious stance on the company courtesy further strain on margins and lost ground in UVs – with present valuations continuing to be far above our comfort zone (trades at 29x P/E on FY23E). We continue to await decisive actions from MSIL on the EV front, retain REDUCE and value it at | 6,080 i.e. 27x P/E (1x PEG) on FY23E EPS of ₹ 225/share (earlier target price | 7,000)

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