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Margin pressure continues, expensive valuations…

About the stock: Maruti Suzuki (MSIL) is the market leader in the domestic passenger vehicle (PV) space with market share pegged at ~48% and popular models being Alto, WagonR, Swift, Brezza, Baleno, Ertiga, etc, among others.

* Market leader in each sub-segment - cars (62.2%), UV (21.6%), vans (96.6%)

* Strong b/s; ~| 44,000 crore cash and investment on books as of FY21

Q2FY22 Results: The company posted a muted performance in Q2FY22.

* Total operating income rose 15.6% QoQ to | 20,539 crore

* EBITDA margins at 4.2% disappointed, declining 46 bps QoQ

* Consequent PAT at | 475 crore was up 7.8% sequentially

What should investors do? MSIL’s stock price has grown at ~5% CAGR from ~| 5,900 levels in October 2016, outperforming the Nifty Auto index in this time.

* We downgrade from REDUCE to SELL on stretched valuations and continued disappointment on margin profile, back ended volume ramp-up

Target Price and Valuation: We value MSIL at a revised target price of | 6,000 i.e., 30x FY23E EPS of | 200/share (previous target | 6,400).

Key triggers for future price performance:

* Riding on pent-up demand & aided by depleted base, we build 11.8%, 19.6% FY21-23E volume, sales CAGR, respectively; FY23E margins at 8.5%

* Elevated fuel prices, government’s push for CNG infra to accelerate CNG penetration and result in outsized gains for MSIL

* Any exciting product launch in UV to combat heightened competition

* Affirmative actions on the new technology landscape in the automobile space including electrification (EV’s)

Alternate Stock Idea: Leaving aside MSIL, in our OEM coverage we like M&M.

* Focused on prudent capital allocation, UV differentiation & EV proactiveness

* BUY with target price of | 1,000

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