MOSL: MARUTI SUZUKI (Buy)-Cyclical pressures easing; Big picture intact

Maruti suzuki: Cyclical pressures easing; Big picture intact; Attractive valuations for the best franchise faced with secular growth opportunity

(msil IN, Mkt Cap USD29.7b, CMP INR7146, TP INR8484, 19% Upside, Buy)

• Oil inflationary cycle abating...: From its recent peak of USD85/bbl, the crude oil price has corrected by ~17%. Domestic PV industry – and also Maruti Suzuki (MSIL) – is highly influenced by the crude cycle, not just in terms of demand but also profitability. This was the first inflationary period under the fuel price deregulation era, which resulted in near real-time transmission of higher crude prices (up 62% from lows of Jun-17) to fuel prices (price of petrol up by 25% and of diesel by 38%), denting auto consumer sentiment.
• ...which should likely lead to gradual receding of associated headwinds: Inflationary crude prices have adversely impacted demand and profitability for auto companies. We note that MSIL’s stock price largely reflects these pressures, with the stock price correcting by 20% since Apr-18, led by consensus EPS cut of ~12% and de-rating of ~8%. However, there has been some improvement of late in the fuel price (5-8% from peak) and FX (~4% appreciation in INR v/s JPY from peak) environment, the benefit of which should drive better demand/margins and lower discounts from 4QFY19.
• Competitive launches not much of a concern as MSIL’s pipeline remains strong: In our view, post the upcoming product rollouts by key competitors, there are not many launches that could hurt MSIL. Also, MSIL’s product pipeline remains strong, with at least two new launches (including full upgrade) per annum for the next 3-5 years. We expect the contribution from new models (less than two years old) and product mix to improve 4QFY19 onward.