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Maruti Suzuki: Expect volume growth of around 30% in FY22E

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Demand for passenger vehicles was stronger than expected once Covid-related lockdown restrictions were lifted due to the shift in preference towards personal mobility.

Product life cycle to be improved: margin recovery levers in place. MSIL stock has underperformed (27% v / s Nifty and 23% v / s NSE Auto Index) over the past six months, impacted by market share / loss and margin pressure, despite strong resumption of volumes. We see both of these concerns subside as the product lifecycle improves, and moderating price increases / discounts leads to a recovery in profitability. We expect volume growth of around 30% in FY22E and positive margin development. We are seeing a 27% increase in our TP of Rs 8,700 / share. MSIL is our top automotive choice.

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Demand for passenger vehicles was stronger than expected once Covid-related lockdown restrictions were lifted due to the shift in preference towards personal mobility. This resulted in a strong demand, the share of first-time buyers (FTB) increasing to 50% in FY21 YTD (against 45% in FY20) of the interior volumes. Domestic industry volumes have been above FY19 levels (previous high) since September 20. The recovery in PV demand would have been better, without a sharp rise in fuel prices (~ 30% increase over the years. last eight months). This has resulted in increased sales of CNG vehicles.

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Significant fuel price inflation has led customers to prefer CNG vehicles due to significantly lower running costs (Rs 1.5 / km v / s Rs 4.5 / km for WagonR CNG v / s gasoline). MSIL has a substantial advantage in CNG as it offers factory-fitted CNG in eight models. MSIL’s CNG vehicle sales are forecast to increase 47% / 59% in FY21E / FY22E. MSIL won the most due to increased demand from first-time buyers, driven by its stronghold in the mini-segment (where its market share increased from ~ 5pp in FY21 YTD to ~ 84) . As we expect FTB’s share to normalize over the next six to nine months, further launches would offset any impact of this situation.

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