India Top Carmaker’s Profit to Recover on Demand for Small Cars

(Bloomberg) -- Maruti Suzuki India Ltd., the nation’s biggest carmaker, is likely to emerge from the coronavirus crisis stronger as the economic crunch will lead to buyers favoring cheaper hatchbacks and shifting to personal cars from shared transportation, analysts said.

Maruti posted a 28% decline in quarterly net income after a nationwide lockdown forced automakers to shut their factories and migrant workers to return to their villages. The company’s profit for the three months ended in March was 12.9 billion rupees ($171 million), compared with the 12.7 billion rupee mean estimate of 18 analysts in a Bloomberg survey.

The carmaker’s fortunes are set to turn around as changing buyer behavior favors Maruti’s dominance in cheap hatchbacks. “Maruti could emerge as the biggest beneficiary of demand recovery in the post-Covid era considering its stronghold in the entry-level segment,” Motilal Oswal analyst Jinesh Gandhi wrote in a note.

While Maruti has reopened one of its three plants, it sees production volume remaining “very low” for as long as two months due to a labor shortage. The pandemic paralyzed India while automakers were already facing their worst-ever slump in sales. Maruti had zero local sales last month because of the lockdown.

“The near-term outlook remains weak amid Covid, but demand shift toward small cars and preference for personal mobility provide silver linings,” Jefferies analyst Nitij Mangal wrote in a note.

Here’s a roundup of brokerage views:

Jefferies (Nitij Mangal)

• The auto industry will see a strong rebound in 2022 on a low base after two years of plunging sales
• Replacement cycle will kick in given the rising age of vehicles
• Estimates earnings per share will grow 35% in 2022
• Maintains buy; PT of 6,000 rupees

Motilal Oswal (Jinesh Gandhi)

• Sees increase in company’s market share driven by shift toward petrol vehicles
• Estimates margins to rebound 11.5% in 2022 on cost-saving initiatives, reduction in operating leverage and lower discounts owing to higher share of new products
• Maintains buy; PT of 5,850 rupees

Dolat Capital (Abhishek Jain)

• Strong balance sheet and rural presence will help Maruti tide over coronavirus-led disruption and provide financial support to vendors, dealers
• Healthy grain output will benefit Maruti, which derives 40% of volume from the rural market
• Expects earnings to recover in 2022, thanks to an estimated 250 bps margin expansion and 13% volume growth
• Recommends accumulate; PT of 5,570 rupees

NOTE: Stock has 35 buy, 8 hold, 7 sell ratings; average price target of 5,594 rupees implies 10% upside: Bloomberg data

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