Equirus Securities

Maruti Suzuki (Long)

Target: ₹8,007

CMP: ₹6,608.95

Adjusted for one-offs of ₹200 crore in other operating income, Maruti Suzuki’s second quarter EBITDA at ₹3,230 crore (-12 per cent yoy, +4 per cent qoq) came in line with our expectation. Due to the combined impact of increasing fuel prices, higher insurance cost and rising interest rates, vehicle demand has softened over the last 2-3 months with even festivals failing to bring cheer.

While carmakers have increased discounts to revive demand, our channel checks indicate that challenges still persist. Considering the slowdown, we cut FY19/ FY20 volume growth estimates to 8 per cent/9 per cent (12 per cent earlier) and trim margin assumptions as well, leading to a 11 per cent/13 per cent cut in EPS.

Long-term story intact

While rising fuel cost and interest rates can impact near-term demand, we believe the long-term growth potential of the market remains intact as cars have become an aspirational item for the working youth. We think MSIL is best placed to capitalize on this potential due to its largest network; that said, new model launches would be crucial as, over the last three years, growth for MSIL as well for industry players has stemmed from the same.

However, MSIL remains a good long-term story due to low car penetration in India.

We upgrade stock to LONG (from ADD) with a September 2019 target price of ₹8,007 set at 26x September ’19 EPS (June 2019 TP of ₹10,163 earlier at 30x).

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