SUV success earns India's largest passenger car maker its highest target on the street

First and foremost, an ‘Improving product mix’, characterized by a higher proportion of utility vehicles (UVs) in Maruti's product lineup, has been a significant driver of their positive outlook. As consumers increasingly favor UVs, Maruti's pivot towards these vehicles bodes well for their future earnings.

Citi alluded to Maruti's success in the SUV segment as it highlighted that the success of the Grand Vitara, the Fronx and steady volumes for the Brezza has insulated the company from the soft demand in entry level cars.

"A year back, a decline in small car sales would have been a big negative for Maruti, with mini and compact cars accounting for 70 percent of the first half of financial year 2023 volumes," Citi wrote in its note.

However, with its successes in the newer launches, the entry level cars now account for only 57 percent of the financial year 2024 volumes so far.

Another brokerage that is positive on Maruti's prospects is Morgan Stanley, which has an overweight rating on the stock with a price target of Rs 11,963. Morgan Stanley mentioned that Maruti's business is turning around as anticipated, and several factors contribute to their optimism.

One significant factor is Maruti's increasing market share in the SUV segment, which aligns with the broader shift in consumer preferences toward these vehicles. The improvement in the product mix and visible volume recovery are additional factors that are contributing to Maruti's positive momentum.

The next key trigger identified by Morgan Stanley is the potential for margin expansion. They anticipate the company's EBITDA margin to grow from 10 percent in the June quarter to 11 percent in the September quarter

To put this into perspective, Maruti's forward-looking price-to-earnings (P/E) ratio for FY25 stands at 23x, which is considerably lower than the 10-year median 12-Month Forward P/E of 25x.

Shares of Maruti Suzuki are trading 0.9 percent higher at Rs 10,372. The stock has risen 23.4 percent so far in 2023.