On Wednesday, Citi adjusted its price target for Maruti Suzuki India Ltd (MSIL:IN), reducing it to INR 13,700 from the previous INR 16,300. The firm maintained a Buy rating on the stock despite a reduction in the target price.
The revision follows Maruti Suzuki's second-quarter financial results for the fiscal year 2025, which showed a steeper-than-anticipated decline in gross margin. This was attributed to increased discounts and commodity costs that the company faced during the period. However, management's outlook on festive demand was notably positive, with a reported 14% year-over-year retail volume growth.
Citi's analyst commented on the situation, stating that discounts have peaked and inventory levels are expected to normalize to just one month's supply by the end of October. Consequently, the firm has revised its EBITDA estimates for Maruti Suzuki to reflect the anticipated lower gross margins.
The price target change also includes a modification in the target EV/EBIT multiple, which has been lowered to 23 times from the previous 26 times due to the trends in profitability. Despite the second quarter's performance, Citi continues to recommend Maruti Suzuki as its top pick in the automotive sector.
The rationale behind the sustained Buy rating lies in the stock's current valuation. Maruti Suzuki's shares are trading at approximately a 35% discount to its five-year average when considering the 16 times one-year forward EV/EBIT multiple, which is the consensus.
Citi believes that the current stock price reflects the demand headwinds but does not fully account for the potential reduction in discounts, improvement in retail sales, and the possibility of a revival in demand for small cars over the next six to twelve months.
InvestingPro Insights
While Citi maintains a Buy rating on Maruti Suzuki India Ltd despite lowering its price target, recent data from InvestingPro provides additional context to the company's financial situation. According to InvestingPro Tips, Maruti Suzuki holds more cash than debt on its balance sheet, which could be a positive sign for investors concerned about the company's financial stability in light of the recent gross margin decline.
The stock has experienced a significant downturn recently, with InvestingPro data showing a 4.29% decline in the past week and a 9.46% drop over the last month. This aligns with Citi's observation of the stock trading at a discount to its historical valuation. However, an InvestingPro Tip indicates that Maruti Suzuki is trading at a low P/E ratio relative to near-term earnings growth, potentially supporting Citi's view that the current stock price may not fully reflect future improvements in discounts and sales.
Another InvestingPro Tip highlights that Maruti Suzuki has maintained dividend payments for 21 consecutive years, which may be appealing to income-focused investors. This consistent dividend history, coupled with the company's prominence in the Automobiles industry, could provide some reassurance to shareholders during this period of margin pressure and valuation adjustment.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips on Maruti Suzuki, providing a deeper insight into the company's financial health and market position.
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