Maruti’s market share, which had taken a beaten in first half of this year, is back to 50%. The recent volume stabilization in passenger vehicle sales and learnings from past down-cycles (this is the 17 th month of volume decline) indicate that we might be close to the bottom for passenger vehicle volume decline.
Interactions with dealers suggest that the deep discounting, which has been rampant in the industry, has come off since November. Notably, most OEMs have announced price hikes from January, implying better pricing discipline and signalling that the worst maybe behind us. There could be a gradual recovery in volumes over FY21 and FY 22 with regulatory headwinds such as BS6 largely behind. Furthermore, easing financing environment, new product launches and an expected improvement in rural demand should provide an impetus to the industry.
For Maruti, margins should improve with better volumes. There are levers for improvement ahead from better operating leverage, receding discounts, benign raw material prices and lower royalties. On the valuation front, it would be prudent to benchmark valuations to FY22 earnings as this captures the recovery as well as margin normalization. On an FY22 basis, the stock trades at about 23x consensus earnings estimates, with an estimated earnings CAGR of 25% over FY20-22. Certainly an interesting consideration for investors looking to buy a piece of one of India’s most iconic enterprises that is on the cusp of recovery.
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