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Maruti Suzuki Rating: Sell, margin pressures likely to persist for firm

Underlying demand trends remain strong; FY23-24e EPS down 11-22%; TP cut to Rs 7,000 from Rs 7,800; ‘Sell’ rating maintained

maruti suzuki
Owing to the sharp jump in aluminum and precious metal prices due to the Ukraine crisis, we expect MSIL’s margin to remain under pressure over the coming quarters.

We maintain SELL rating on MSIL as we expect margin pressures to persist due to sharp increase in aluminum and precious metal prices. The company will find it challenging to completely pass on the RM impact to consumers as it may derail demand recovery, especially in entry-level segments. Owing to aggressive product launches by the company, advertisement and marketing spends are expected to remain at elevated levels, which may pose challenges with respect to cost control.
Commodity inflation to put pressure on gross margins.

Owing to the sharp jump in aluminum and precious metal prices due to the Ukraine crisis, we expect MSIL’s margin to remain under pressure over the coming quarters. Aluminum and palladium spot prices have increased by 40-55% from Q3FY22 levels. Aluminum and precious metal content form around 10% of ASPs for the company. So, we expect gross profit per vehicle to remain under pressure during H1FY23e (commodity inflation impact will come with a quarter lag).

Overall, we are baking in gross profit per vehicle (excluding other operating income) to only improve marginally by 2% y-o-y to 108,000 per vehicle led by (i) recovery in gross profitability during H2FY23e and (ii) staggered price hikes, mainly in the SUV segment. Underlying demand trends remain strong We expect MSIL’s domestic PV segment volumes to grow by 11% CAGR over FY2021-24e (17% volume CAGR over FY2022-24e) led by (i) strong underlying demand trends as bookings continue to maintain a healthy momentum, (ii) healthy order book of >0.25 mn units and (iii) improvement in chip availability. Due to increase in upfront cost and sharp jump in fuel prices expected over the coming weeks, we may see deferral in replacement demand, especially in the entry-level hatchback segment where MSIL has a dominant position. Product launches by MSIL to aid market share gain We expect MSIL’s market share to increase by 200-250 bps over FY2022-24e aided by aggressive product launches. However, we do not expect the company to reach ~50% market share due to (i) lack of diesel offering in the mid-size SUV segment, (ii) high competitive intensity in premium hatchback and compact SUV segments, (iii) entry of Tata Motors into the CNG segment with launch of Tiago and Tigor and (iv) demand pressures in the entry-level hatchback segment. Cut FY23-24e EPS estimates by 11-22%; maintain SELL rating We have cut our FY2023-24e EPS estimates by 11-22% led by (i) 3-4% cut in volume estimates on deferment in replacement demand and (ii) 120-190 bps cut in Ebitda margin assumptions due to RM inflation. We revise FV to7,000 (from Rs 7,800 earlier).

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