Maruti Suzuki continues to drive strong volumes, but can you take this stock on a long drive?

Maruti Suzuki India’s reported growth in volume in the July-September quarter but net profit moved up marginally to Rs 1,371 crore against Rs 1,358 crore in the same period last year. Although this might signal a recovery to pre-coronavirus levels, the share price was not impressed, tumbling down over 2% to Rs 6,968 per share on Friday morning. The largest car-manufacturer in the country reported EBITDA lower than what the street had estimated owing to lower average selling price. Gross profit per vehicle came in at Rs 1.43 lakh in the second quarter of the fiscal versus Rs 1.44 lakh per vehicle in the previous year.

Sales improve but will demand sustain?

In the July-September quarter, domestic sales of Maruti Suzuki India grew 19% while exports fell 13%. As domestic sales make up 94% of the total sales, the company managed to record a 16% growth in total sales. During the quarter, Maruti Suzuki registered net sales of Rs 17,689 crore, higher by 9.7% compared to the same period previous year. However, the sharp increase in sale could be pent-up demand, and analysts at Kotak Securities are advising caution, feeling the demand may not sustain further. 

“After 16% on-year volume decline in financial year 2020, we expect Maruti Suzuki India’s volumes to further decline by 13% on-year this fiscal year due to a weak demand scenario amid the pandemic,” said Kotak Securities in a report. In the October-December quarter the volume growth might be good but going forward in the fourth quarter is where Kotak Securities is predicting weakness. 

ASP comes down, volumes in focus

Maruti Suzuki has seen its average selling price take a hit over the years. According to the company management, the lack of diesel cars has impacted ASPs. Diesel cars usually command a better ASP when compared to petrol cars. “We expect Maruti Suzuki to continue to gain market share driven by its unchallenged franchise. However, margins are expected to remain range-bound as earnings are likely to be largely driven by volume growth than improvement in average selling price ASP/margins,” said Edelweiss Securities. They added that  competitive intensity may rise after the implementation of BSVI norms earlier this year which may not be adequately captured in the firm’s current valuation.

Shift to personal mobility – a boon

With its dominant market share, Maruti Suzuki could stand to benefit the most from a shift towards personal mobility in the country. “We believe Maruti Suzuki is not only the beneficiary of a likely trend of shift towards personal mobility and down trading but also seeing structural shift towards petrol cars especially in lower CC segments,” said brokerage and research firm Prabhudas Lilladher in a note. The firm saw a massive 48% jump in first time buyers and CNG mixed improved 11.2%.

Should you buy?

Analysts across the board have a different opinion on Maruti Suzuki’s stock. Kotak Securities finds valuations to be expensive and sees demand going down in the last quarter while pinning a fair value of Rs 5,200 per share. With valuations of FY21/22E PE of 47.6x/27.9x, Edelweiss Securities finds them to be pricing in any positives but acknowledges the strong franchise of Maruti Suzuki but still advises investors to Hold with a target price of Rs 6,946 apiece. Prabhudas Lilladher is confident that Maruti will see demand as rural share rises as it pins a target price of 7,642 per share with a Buy call.