Maruti Suzuki: Expect ~30% volume growth in FY22E

Product life cycle to improve: Levers for margin recovery in place. The MSIL stock has underperformed (27% v/s Nifty and 23% v/s NSE Auto Index) in the last six months, impacted by market share/loss and pressure on margin, despite a strong volume recovery. We see both these concerns abating as product life cycle improves, and price increase/discount moderation drives a recovery in profitability. We expect ~30% volume growth in FY22E and positive evolution of margin. We see 27% upside at our TP of Rs 8,700/share. MSIL is our top auto pick.

Demand for passenger vehicles was stronger than expected once Covid-related lockdown restrictions were lifted due to shift in preference towards personal mobility. This was reflected in strong demand with first-time buyer (FTB) share increasing to 50% in FY21 YTD (from 45% in FY20) of domestic volumes. Domestic volumes for the industry have been higher than FY19 levels (previous peak) since Sep’20 onwards. Recovery in the PV demand would have been better, but for a sharp rise in fuel prices (~30% increase in the last eight months). This, resulted in an increase in sales of CNG vehicles.

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