Analyst Corner: Maintain ‘sell’ on Maruti Suzuki; revise FV to Rs 5,200

Demand recovers but could be short-lived. Maruti Suzuki reported Ebitda of Rs 19.3 billion in 2QFY21 (+20% y-o-y) due to recovery in volumes. Ebitda was lower than our estimates because of lower ASPs and higher other expenses. Even as the volume growth outlook is quite strong for 3QFY21, we believe it is more due to pent-up demand and the strength may not sustain post December 2020. Maintain ‘sell’ owing to expensive valuations; revise FV to Rs 5,200 (from Rs 4,500).

The company reported 2QFY21 Ebitda of Rs 19.3 billion (+20% y-o-y), which was 12% below our estimates due to lower-than-expected ASP and higher-than-expected other expenses.

Net revenues increased by 10% y-o-y led by 16% y-o-y increase in volumes, offset by 5.6% y-o-y decline in ASPs led by an inferior product mix (higher share of entry-level models and the mix within models also shifted to lower variants as volumes scaled up well). Gross profit per vehicle came in at Rs 143,215 in 2QFY21 versus Rs 144,418 per vehicle in 2QFY20 despite a Rs 8,000 per vehicle reduction in discounts on y-o-y basis, offset by increase in input costs and an inferior product mix. Staff costs was flat y-o-y but other expenses increased by 18% y-o-y in 2QFY21.

We expect the input cost pressures to rise going forward, capping gross profit per vehicle at current levels despite strong cost-reduction efforts by the company. Despite operating at peak capacity utilization, the company believes increase in prices could impact volumes.

After 16% y-o-y volume decline in FY2020, we expect MSIL’s volumes to further decline by 13% y-o-y in FY2021E due to a weak demand scenario amid the pandemic. However, outlook for volume growth is quite strong for 3QFY21 due to pent-up demand, but we expect it to slow down from 4QFY21 onwards. The company’s weak SUV portfolio could also restrict growth once urban demand rebounds although rural demand will likely remain strong in our view.