Maintain BUY on Maruti Suzuki - Improving outlook - HDFC Securities

Ms. Aditya Makharia, Institutional Research Analyst, HDFC Securities.

While Maruti reported a loss of Rs 2.5bn in 1QFY21, impacted by COVID and constrained production, the outlook is encouraging as demand has returned to ~85% of pre-COVID levels currently. While the company has ramped up production to 4,000 units/day, the OEM remains constrained for supply due to the limited activity at the Gujarat plant. Maruti is benefitting from its entry-level portfolio as customers are turning towards the use of personal mobility in the current environment. The share of first-time buyers has risen by ~5% (from 45% in 4QFY20). Further, the OEM's strategy of exiting the diesel segment is working as gasoline and diesel fuel prices have levelled off in Delhi/substantially narrowed in other regions. Reiterate Maruti as our top pick in the sector. Maintain BUY with a revised target price of Rs 6,980 at 25x Jun-22E EPS (~15% premium to the long-term historic trading multiple). Key risk: An increase in competitive intensity.

1QFY21 financials: Revenue declined 79% YoY to Rs 41bn due to an 81% decline in overall volumes. Wholesale volumes for the quarter were 76.6k, and retail volumes were 119k units. The company reported an EBITDA loss of Rs 8.6bn due to the COVID impact. Higher other income (Rs 13bn vs Rs 8.3bn YoY) partially offset the above. MSIL reported a loss of Rs 2.5bn.

Call takeaways: (1) Positive demand outlook: Inquiries are currently at 85-90% of pre-COVID levels. In Jun-20, several regions witnessed positive YoY growth in retails. Demand in top-10 cities (36% of demand) is gradually expected to improve as COVID cases are levelling off. (2) Drop in replacement demand: Replacement demand (dropped from 25% to 16%) is impacted as consumers are using their existing vehicles for longer. (3) Diesel share is shrinking: Share of diesel vehicles for the industry fell to 20.6% in 1QFY21 vs. 29.5% YoY, which is benefiting Maruti as it has exited this segment. Mid-end/high-end SUVs are primarily diesel-powered due to the higher torque requirements. (4) Production ramp-up: Currently, the OEM manufactures 4000+ units/day across its Haryana and Gujarat (single-shift) plants. As the Gujarat plant starts with the second shift in mid-Aug20, Maruti will produce an incremental 900 units per day.

Shares of MARUTI SUZUKI INDIA LTD. was last trading in BSE at Rs.6247 as compared to the previous close of Rs. 6265.65. The total number of shares traded during the day was 47079 in over 8791 trades.

The stock hit an intraday high of Rs. 6379.65 and intraday low of 6208. The net turnover during the day was Rs. 296182932.

Source : Equity Bulls

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