scorecardresearchMaruti near 52-week high: What is the road ahead for India's largest automaker?

Maruti near 52-week high: What is the road ahead for India's largest automaker?

Updated: 03 Aug 2022, 03:58 PM IST
TL;DR.
  • On July 27, Maruti reported its April-June quarter (Q1FY23) result in which it said its profit after tax (PAT) grew 129.76% year-on-year (YoY) to 1012.8 crore in Q1FY23 from 441 crore in the corresponding quarter last year.
FILE PHOTO: Maruti reported a lower-than-expected quarterly profit as rising input costs and supply chain constraints hurt earnings. REUTERS/Anindito Mukherjee/File Photo/File Photo

FILE PHOTO: Maruti reported a lower-than-expected quarterly profit as rising input costs and supply chain constraints hurt earnings. REUTERS/Anindito Mukherjee/File Photo/File Photo

Shares of Maruti Suzuki India fell more than 3% as investors booked profit in the stock after it clocked healthy gains in the last few sessions.

Shares of Maruti Suzuki ended 2.29% lower at 8,956.70 on August 3.

The stock hit its 52-week high of 9,195 on August 2, 2022. Shares of India's largest automaker have been on a roll this year even as concerns over soaring commodity prices, rate hikes and faltering economic growth persisted. In the year 2022 so far, the stock has gained 23%.

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Maruti shares in last one year. 

On July 27, the company reported its April-June quarter (Q1FY23) result in which it said its profit after tax (PAT) grew 129.76% year-on-year (YoY) to 1012.8 crore in Q1FY23 from 441 crore in the corresponding quarter last year.

Revenue from operations came at 26,499.8 crore in Q1FY23, up 49% YoY for the quarter under review, but down 0.8% QoQ.

However, the company reported a lower-than-expected quarterly profit as rising input costs and supply chain constraints hurt earnings. Analysts expected the company's net profit for the quarter between 200% and 300% on a low base of last year.

During the quarter, Maruti registered net sales of 25,286.3 crore, an increase of 50.52% compared to the same period of the previous year.

The market seemed happy with Maruti's Q1 numbers as the stock remained in the green in the next four consecutive trading sessions.

The road ahead

The negatives

The company has been struggling to increase margins and as Julius Baer pointed out it has less room to improve margins through scale or operating leverage. Reliance on excessive discounts to drive sales volumes and weak presence in the large and premium car space is also a weakness of Maruti.

While increasing competition, leading to pricing pressure and discounts is a challenge, inflation remains a major concern along with rate hikes.

Julius Baer added that high cash balance risks leading to sub-optimal capital allocation, while the focus on land purchases could hit margins and capital returns.

The positives

The country's largest automaker looks poised for growth due to a healthy demand environment and the company's efforts regarding new launches. With the prospects of a normal monsoon, the rural sentiment has improved which is expected to augur well for the consumer vehicles segment.

The company's biggest strength is its leadership position in the small car segment. A wide distribution network, a well-developed vendor base and brand equity in the compact/entry-level space give Maruti an edge against its peers.

As the brokerage firm Julius Baer pointed out, "the outlook for the company seems constructive with an improving demand environment and a favourable product lifecycle over the next couple of years with Maruti aggressively looking at new launches, including plugging gaps in its product portfolio (especially in the SUV [6] segment), and refreshes of its existing products. The long-term industry drivers remain intact, with low PV penetration, rising income levels, and improving road infrastructure."

Maruti is a preferred pick of Julius Baer in the PV segment. It has a buy call on the stock and has raised the target price to 10,150 from 9,350.

Motilal Oswal Financial Services, which has a buy call on the stock with a target price of 10,700 believes strong demand and favourable product lifecycle for Maruti augurs well for its market share and margins.

"We expect a recovery in the second half of FY23 (2HFY23) in both market share and margins, led by an improvement in supplies, favourable product lifecycle, improved mix, as well as RM/FX benefits and operating leverage," Motilal Oswal said.

Brokerage firm JM Financial also has a buy call on the stock with a target price of 10,300. The brokerage firm highlighted the recent correction in commodity costs and the favourable impact of currency movement will start reflecting from Q2FY23 margins.

"We estimate revenue and EPS CAGR of 18% and 82%, respectively, over FY22-24E. After two consecutive years of volume decline, we believe that Maruti is at the cusp of a new upcycle. New model launches in the coming months, healthy order book and commodity and currency tailwinds will further support strong performance going ahead," said JM Financial.

The overall outlook for the auto sector has improved which is an additional positive for Maruti.

After witnessing major headwinds over the last three years, visible signs of a recovery are seen in the auto sector.

“There is a volume recovery across segments (except tractors and two-wheelers), with softening raw material costs aiding company margins from the second half of FY23 onwards,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.

At this juncture, it appears that shares of Maruti have more steam left. However, geopolitical tensions, inflation and rate hikes and their impact on the economy remain short-term challenges.

According to a MintGenie poll, an average of 46 analysts have a ‘buy’ call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.

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First Published: 03 Aug 2022, 03:12 PM IST