Maruti stock accelerates 6% on margin hopes; other auto stocks gain

Shares of Maruti Suzuki India (MSIL), India’s largest passenger vehicle maker, hit an over three-month high of Rs 8,319.80 in intraday trade before closing 6.33 per cent higher at Rs 8,274.6 on the BSE on Thursday. This is the highest level seen since February 28 this year.

The gains are on hopes of margin improvement due to stable commodities prices.

In a separate development, the company on Monday opened bookings for the country’s new version of compact sport utility vehicle (SUV) - Brezza.

Improving macro conditions also saw stocks of other automotive (auto) companies rise sharply, including Eichers Motors (up 5.95 per cent), Hero MotoCorp (5.8 per cent), Ashok Leyland, Mahindra & Mahindra, and Bajaj Auto. They were up between 4 per cent and 5 per cent. As a result, the S&P BSE Auto Index, with 4.42 per cent rise, was the top sectoral gainer on Thursday. All constituents of the auto index ended in the green.

The stock of passenger cars and utility vehicles company has recovered over 26 per cent from its 52-week low price of Rs 6,540 hit on March 8.

MSIL’s profitability has been adversely impacted in the past three years by weak product lifecycle, unprecedented commodity-cost inflation in base commodities and precious metals, and multiple headwinds to volumes, resulting in operating deleverage.

This has resulted in sharp erosion in its gross margin (610 basis points, or bps) and earnings before interest and tax (Ebit) margin (570 bpd) over 2018-19 through 2021-22 (FY22).

However, stable commodity cost during the fourth quarter (Q4) of FY22 and benefit of pricing action were reflected in gross margin and Ebit improvement of 180 bps and 270 bps quarter-on-quarter in Q4FY22, respectively, Motilal Oswal Financial Services said in a stock update.The brokerage firm expects improving supplies, product mix, and stable commodity prices to drive an Ebit margin expansion of 550 bps to 8.8 per cent over FY22 through 2023-24 (FY24).

“Strong demand, improving chip supplies, moderating commodity inflation, and favourable foreign exchange would support margin recovery. Robust demand, coupled with strong recoveries in both market share (plus 600 bps) and margins (plus 550 bps) over FY22-24E, would drive 66 per cent compound annual growth rate in earnings per share,” said the brokerage firm, with a ‘buy’ rating on the stock and a target price of Rs 10,000 per share.

Meanwhile, MSIL said the contribution of sales from non-urban markets in overall sales increased to 43.6 per cent in 2020-21 through FY22.

In March, MISL parent company Suzuki Motor Corporation through its subsidiary Suzuki Motor Gujarat signed a memorandum of understanding with the Gujarat government to invest Rs 10,400 crore in electric vehicles (EV) and battery manufacturing capacity. This investment will support localising EV manufacturing and help MSIL accelerate and expand its EV portfolio in India. The company is planning to introduce its first EV by 2025.

Meanwhile, according to analysts at Emkay Global, upcoming products within the next 18 months, including sub-4 metre (m) compact SUV, off-roader (Jimny), mid-sized SUV, and sub-4m crossover, should fill major white spaces in MSIL’s product portfolio.

In addition, the launch of feature-rich new-generation models of the Baleno, Celerio, Brezza, Ertiga, XL6, and the S-Cross should support volumes.

MSIL’s market share should increase from 45 per cent in FY22 to 46 per cent in FY24E, observed the brokerage.