Brokerage firm Motilal Oswal Financial Services has a 'buy' call on Maruti Suzuki (MSIL) with a target price of ₹11,300, implying a 26% upside from the stock's August 16 closing of ₹8,999.45 on BSE.
The brokerage firm said strong demand and favourable product lifecycle for MSIL augurs well for market share and margin. It expects a recovery in both market share and margin in 2HFY23, led by an improvement in supplies and mix, a favourable product lifecycle, RM and forex benefits, and operating leverage.
On the valuation front, the stock currently trades at 39 times and 23.5 times FY23E and FY24E consolidated EPS (earnings per share), respectively.
Here are the five things that Motilal Oswal highlighted in MSIL’s FY22 annual report.
1. Focusses on the SUV segment by launching new age products to fill product gaps
The brokerage firm pointed out that while the SUV segment continued to grow faster in FY22, MSIL faced some product gaps in this segment, resulting in a loss in market share.
"It is strengthening its presence in the SUV segment, with the recent launch of the Brezza and Grand Vitara. It plans to further solidify its presence with additional launches. Beyond SUV, it has been working on products in other segments and new-age features like heads-up display (HUD), 360 view camera, SmartPlay Pro+ infotainment system with an HD display, inbuilt next-gen Suzuki connect, electronic stability program (ESP), ventilated seats, etc.," Motilal Oswal said.
2. Targets 2 million units in FY23 and regains 50% market share in the near future
In FY23, vehicle production will increase as the availability of semiconductors has improved. MSIL has also made further improvisations to enhance production. This, coupled with the recently launched Brezza and Grand Vitara, will help it reach 2 million (20 lakh) units in FY23, Motilal Oswal pointed out.
With an expansion and refreshment of its product portfolio, and offerings of new age features and fuel-efficient technologies, it is looking to regain its market share of 50% in the near future, the brokerage firm said.
3. Kicks off the electrification drive with a strong hybrid
With the introduction of a strong hybrid technology in Grand Vitara, MSIL has taken the first step toward electrification. This technology delivers fuel efficiency of 27.97km/litre in official tests, which is almost 10 km/litre higher than its competitors. CO2 emissions are lower by 26.4% and energy efficiency is higher by 35.9% as compared to its ICE variant, Motilal Oswal said.
It plans to launch its first BEV in CY25. It has localized the manufacture of its battery pack through the Toshiba-Denso-Suzuki joint venture (TDSG) and will be supplying batteries for the strong Hybrid. TDSG is India’s first lithium-ion battery manufacturing plant with cell-level localization, the brokerage firm added.
4. Multiple means to meet the end objective of CO2 reduction
In the run-up to full electrification, the management plans to reduce CO2 emissions via the use of CNG, ethanol, biogas, and strong Hybrids, the brokerage firm said.
CNG has seen strong traction in FY22, up 48% YoY, led by a 43% increase in CNG outlets to 4,433. CNG vehicles constituted 17% of MSIL’s domestic volumes (versus 12% in FY21). With the government’s focus on CNG and its aim of expanding its reach to 17,000 outlets, the demand for CNG vehicles is expected to remain high, said the brokerage firm.
Further, the brokerage said that MSIL’s petrol models are already compatible with 10% ethanol blended petrol (EBP). It is getting ready for 20% EBP (applicable from April 2023). Its CNG vehicles can run on compressed biogas without any modification.
5. Exports - FY22 was a year of inflection
Exports grew 148% in FY22 as the semiconductor shortages did not majorly affect its export models. Exports to Africa, particularly South Africa, grew 200% and accounted for nearly 50% of the total export volume in FY22, led by a better demand environment and its efforts in developing these markets over the past few years, Motilal Oswal said.
Besides expanding its product portfolio and its reach, its best practices are being implemented to further enhance customer satisfaction. Supplies to Toyota, via SMC in the African market, also boosted exports. It also saw strong growth in exports to Latin America and the Middle East, which are among its other important export destinations, the brokerage firm added.
Other than these 5 key highlights, the brokerage firm also highlighted that the company has performed remarkably on the front of transition to phase II of BS-VI emission norms. Out of a total of 61 applications, MSIL has transitioned 31 applications to BS-VI Phase-II by Apr’22. It is planning to complete the rest prior to the regulatory deadline.
The company's new plant can potentially become the largest in the world. Maruti has finalized a land purchase at Kharkhoda (Haryana) to set up a new plant, with the first/second phase of commissioning in CY25/CY26. This site has the potential to become one of the largest car manufacturing sites globally. It is also increasing its annual capacity at Manesar by another 1,00,000 units, Motilal Oswal said.
On the front of finances, MSIL saw savings of ₹1.7b/ ₹3b in FY22 from localization/VAVE (versus ₹1.4b/ ₹2.5b in FY21). Total savings stood at 0.5% of total sales (versus 0.6% in FY21). Despite these savings, RM cost, as a percentage of sales, grew 330bp due to commodity cost inflation. Core working capital days rose to -17 days from -30 days in FY21 due to a reduction in payable days, Motilal Oswal said.
The brokerage firm added that the company's weak operating performance and higher working capital led to a sharp decline in CFO to ₹17.9b in FY22 from ₹88.4b in FY21. This, coupled with an increase in capex, led to the first negative FCF in a decade (at - ₹15.3b versus ₹65b in FY21).
"Considering a weak operating performance in a Covid-affected FY22, RoE (return on equity) fell to 7% (down 120bp YoY). This is the lowest RoE in MSIL’s listed history. However, RoIC (return on invested capital) improved by 7.9pp to 26.8% in FY22," said Motilal Oswal.
According to a MintGenie poll, an average of 46 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations are those of individual analysts or broking firms and not of MintGenie.
