Buy Maruti Suzuki Ltd for the Target Rs.17,064 by Motilal Oswal Financial Services Ltd
Demand outlook remains upbeat Two price hikes and cooling input costs to help revive margins
* Maruti Suzuki’s (MSIL) 1QFY27 PAT declined ~11% YoY to INR33.5b, in line with our estimate. However, EBITDA margin at 8.2% was much lower than the estimated 9.7%, largely due to elevated commodity costs. This was partly offset by higher-than-expected other income.
* We expect MSIL to sustain its outperformance in FY27, aided by a healthy launch pipeline, revival in car demand, lean inventory, and ramp-up of its two new facilities. A sustained market share recovery is likely to, in turn, drive the stock re-rating, in our opinion. Further, after a relatively weak 1Q, margins are expected to normalize, given the moderating raw material costs and steady volume growth. We expect MSIL to deliver a 20% earnings CAGR over FY26-28. We reiterate our BUY rating with a TP of INR17,064, valued at 26x FY28E EPS
1Q margins under pressure; likely to normalize going ahead
* MSIL’s 1QFY27 revenue grew 36% YoY to INR524.5b, in line with our estimate. The combined effect of volume growth (+29% YoY) and improvement in average realization per car (+5% YoY) led to this healthy performance.
* EBITDA margin contracted 380bp YoY to 8.2% and was below our estimate of 9.7%. Margin pressure was led by:
1) commodity headwinds (300bp), higher gas costs (20bp), fixed costs on account of inventory depletion (30bp), forex impact (30bp), and higher employee costs (40bp). This was partially offset by lower other expenses of 30bp and higher other operating income of 30bp.
* EBITDA declined 7% YoY to INR43.1b (14% below estimates).
* Non-operating income came in at ~INR18.7b (vs. est. INR11b). ? Overall, PAT declined 11% YoY to INR33.5b (in line).
Valuation and view
We expect MSIL to sustain its outperformance in FY27, aided by a healthy launch pipeline, revival in car demand, lean inventory, and ramp-up of its two new facilities. A sustained market share recovery is likely to, in turn, drive the stock re-rating, in our opinion. Further, after a relatively weak 1Q, margins are expected to normalize, given the moderating raw material costs and steady volume growth. We expect MSIL to deliver a 20% earnings CAGR over FY26-28. We reiterate our BUY rating with a TP of INR17,064, valued at 26x FY28E EPS.
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