Add Maruti Suzuki India Ltd For Target Rs.10,700 - Emkay Global Financial Services
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As per media, Hyundai has plans to list its Indian arm Hyundai Motors India (2nd largest PV OEM with 14.9% FY24YTD market share) this year, at ~ USD22- 28bn valuation. Such valuation offers up to ~50%/45% upside risk to our MSIL TP/CMP (Exhibit 1) based on various scenarios for valuations (upper/lower band) and discounts (at par or at 20% discount to Hyundai). We believe MSIL could trade at similar valuations as Hyundai, amid Suzuki’s large India dependence and Toyota’s support/alliance, offset by Hyundai’s strong global standing and premium positioning. Potential small-car recovery (akin to commuter motorcycles) and MSIL’s E-SUV launch in ~Oct-24 (industry’s firstborn EV launch) are added upside risks. Post recent run-up, we assign REDUCE (vs. ADD earlier) with unchanged TP of Rs10,700/share (25x core FY26E PER).
Underlying trends (inventory, orderbook, discounts) weakening for MSIL
Growth in the PV industry over the past 5-7 years has been entirely driven by new launches. Companies with a strong product cycle have gained market share with healthy volume growth, while those with fewer launches have suffered loss in market share. During the past 12-18 months, led by healthy response to its SUV launches (particularly the new Brezza, Grand Vitara and Fronx), MSIL has reported ~40bps market-share gains YoY in FY24YTD. While we expect share gains to continue over FY24E-26E by virtue of the freshness of MSIL’s recent product actions combined with major competition launches now largely behind, we believe emerging trends need to be monitored, e.g. slowing retails, rising inventory, rapid run-down in the orderbook (215K units in Q3 vs. 288K/355K units in Q2/Q1), and rising discounts even in SUVs.
Best of profitability appears to be behind
Q2FY24 likely represented peak margin performance for MSIL (12.9%) amid confluence of positive factors like volume growth, improved SUV mix, favorable commodities and forex, and lower discounts. In Q3, MSIL’s ASPs fell ~1% QoQ, with margins slipping by 118bps QoQ to 11.7%, due to operating deleverage, higher discounts, and advertisement expenses (~110bps, ~70bps, and ~30bps QoQ impact, resp., at the EBIT level). Given the muted growth outlook and challenges emerging in underlying trends (inventory, orderbook, discounts), we believe that the best of profitability appears to be behind.
Muted outlook beyond FY24E with growth concerns starting to play out
MSIL in its Q3 call indicated modest ~3% industry growth expectations for FY25E, with no imminent entry-level revival seen yet; amid limited new launch action (electric SUV ‘EVX’ to be the next major launch for MSIL around Oct-24), we build-in a muted ~5% volume CAGR over FY24E-26E; this also drives relatively subdued expectations of ~8% EPS CAGR for FY24E-26E. We assign a REDUCE rating to the stock (vs. ADD earlier), with unchanged estimates and TP of Rs10,700/sh at 25x core FY26E PER. Potential revival in small cars and the upcoming E-SUV launch are upside risks for MSIL.
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