Home / Markets / Mark To Market /  Maruti Suzuki to gain from many tailwinds; Edelweiss upgrades rating

Maruti Suzuki India Ltd. is set to benefit from various factors in the coming quarters, including robust demand conditions, easing of commodity prices and a weaker yen. Plus, there are new launches in the sport utility vehicle (SUV) segment where demand has been staging a rise. Such products have been plugging gaps in the automaker’s portfolio. Against this backdrop, Edelweiss Securities has upgraded the rating on the Maruti stock from Hold to Buy.

The broking firm recently interacted with Maruti’s management where the latter said that its order book excluding Grand Vitara stands at 400,000 units. This indicates strong demand but note that there is a possibility that the order book reflects under-production to a certain extent given the lingering issue of chip shortage.

However, the situation is improving and that bodes well. In the September quarter (Q2FY23), Maruti’s total wholesale volumes rose nearly 11% sequentially to 517,395 units. Further, the new launches would add to volumes. Edelweiss expects the new-Brezza and Grand Vitara to clock volumes of 10,000 per month each.

What’s more, Maruti plans on launching more vehicles. “Maruti has identified four key buckets of consumer profile: entry SUV customers; upgraders; off-roading/jeep customers; and premium SUV customers. Each bucket has further sub-segmentation. The company plans to launch products across most of the identified sub-segments," said the Edelweiss report dated 3 October.

All said, it remains to be seen if Maruti is successful in regaining the lost market share amid high competitive intensity. Also, inflationary pressures have taken a toll on the demand in the compact car segment where Maruti has a sizeable presence.

On the margin front, the fall in prices of key commodities such as aluminium and steel comes as a relief. The favourable currency movement is a plus.

Even so, Edelweiss does not expect Maruti’s Ebit (earnings before interest and tax) margin to touch the previous peak of about 11% in the near to medium term. This is due to a greater share of contract manufacturing, higher bought component (battery) in the hybrid option and stiffer competition.

The Ebit margin in Q1 stood at almost 5%. Investors would do well to track the margin performance in Q2 as the benefits from softening commodity costs would meaningfully reflect in the financials from Q3.

Led by forex benefits and optimism around new launches, Edelweiss has raised FY23/FY24E earnings per share estimates by 5%/11%. Also, the broking firm has raised the target price to Rs10,685 from Rs8,964 earlier. The stock currently trades at Rs8,674.30 apiece.


Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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