MSIL’s ebitda margin could surprise the Street positively as we expect pricing to improve over the next 2-3 years with (i) capacity utilisation of the PV industry inching up from 67% (FY2017) to 82% (FY2020), (ii) mix of higher-margin models increasing due to capacity constraint and (iii) sharp increase in Gujarat plant production, which could result in operating leverage benefit. We raise our target price to Rs 7,700 (from Rs 6,600 earlier) as we increase our EPS by 4% and raise target multiple to 22X June 2019e EPS from 20X March 2019e earlier. Industry capacity utilisation could improve significantly over the next three years: We highlight that capacity utilisation of the PV industry is likely to improve significantly over the next three years from 67% in FY2017 to 82% by FY2020.
Industry capacity utilisation has been stuck at mid-60s for past six years, which has not led to improvement in pricing power of the industry. Over the next few years, MSIL and Hyundai are likely to operate at almost 100% capacity utilisation while capacity utilisation of players such as Honda, Nissan and Toyota will inch up sharply; this could lead to improvement in pricing in the passenger vehicle industry.
Pricing could emerge a big tailwind for MSIL’s margins over the next few years apart from improvement in product mix as MSIL balances its capacity to produce high-margin models (i.e. Baleno and Vitara Brezza). Capacity constraints will help MSIL push higher margin models: We expect the revenue share of Baleno and Brezza to increase to 32% of total revenues by FY2020 from 20% in FY2017. As Baleno and Brezza achieve cumulative volumes of 200,000 since launch in FY2018 itself, we see margins of these two models increasing significantly in FY2019-20.
MSIL’srecent launches like Baleno, Vitara Brezza, new Dzire and Ignis are on waiting periods of 4-18 weeks so Maruti has the luxury of increasing production of these models since the company is facing capacity shortfall. We raise our EPS estimates by 4% for FY2019 led by increase in volumes: We have increased our EPS estimate for FY2019 by 4% led by 3% increase in our volume estimates. MSIL is ramping up capacity at Gujarat plant at a faster pace than Street’s expectations.
We expect MSIL to increase capacity to 250,000 units at Gujarat plant by Q3FY18 itself and produce 200,000 units from Gujarat plant in FY2018 versus earlier expectations of 150,000 units. We increase our target price to Rs 7,700 (from Rs 6,600 earlier) factoring in a 4% increase in EPS estimates for FY2019 and raising target multiple to 22X on core June 2019E EPS (versus 20X March 2019E EPS). We value cash and cash equivalents at Rs 1,100/share.