buy initiating coverage maruti suzuki ltd target price
TRANSCRIPT
Initiating Coverage
20th October, 2020
Buy
Target Price
7920
Maruti Suzuki Ltd
Auto OEM
1
Strong leadership position, Healthy recovery in PV segment to drive growth
We are initiating coverage on Maruti Suzuki India Limited (MSIL) with a BUY recommendation and a Target Price of Rs 7,920, which implies 16% upside from the current levels. MSIL, in our opinion could emerge as the biggest beneficiary of demand recovery in the post-COVID era, considering its stronghold in the entry-level segment and a favorable product life cycle. MSIL’s new launches, targeted at filling the gaps in its portfolio, are likely to improve the overall product mix. Company has defended its dominant franchise and improved its brand acceptability over the years through new launches and innovative sales strategies. We expect the company to register Revenue/Ebitda/PAT CAGR of 9%/20%/19% from FY20-FY23E driven by volume CAGR of 6.5% over FY20-23E. We value MSIL at 25x FY23E Price to Earnings to arrive at TP of Rs.7,920 resulting in an upside of 16% from the current levels.
Our investment thesis is based on the following premises:
Well positioned to benefit from demand recovery
While Covid-19 has hurt the Passenger Vehicle (PV) industry demand in the near-term, we believe PV industry faces fewer headwinds for a revival given lower cost impact of BS6 norms on 4Ws as compared to 2Ws. The PV industry is exhibiting a strong sequential recovery, but it is difficult to ascertain how far the same is a function of the gradual easing of restrictions and the result of pent-up demand. However, witnessing the sustainability of the demand over last 2-3 months gives confidence that demand will continue to remain robust as we advance towards the festive season. We expect MSIL to gain market share in FY2021E given its (1) higher presence in rural areas (rural demand remains resilient), (2) a wide distribution network, (3) preference for lower-end hatchback cars (MSIL is the leader) given the weak economic environment and (4) expected shift towards petrol vehicles.
Preference for personal mobility and down-trading trend to benefit MSIL
Shift in preference for personal mobility over shared mobility on account of COVID-19 will lead to increase in demand for personal vehicles. With lower income and job losses, down-trading is expected. Current data (in terms of enquiries) indicates that there is a spike in demand for smaller cars. Enquiries for smaller cars are at ~65% versus ~56% previously. Going forward, sustanined demand will be driven by income levels and economic activity and sentiments. MSIL is well placed to capitalise on this demand given its strong brand equity and strength in entry-and mid-segment PVs. (MSIL commands ~80% & ~60% market share in the Mini and Compact PV segment respectively).
Suzuki-Toyota collaboration to mitigate the EV risk
Toyota and Suzuki have announced a roadmap for collaboration between the two companies in India as well as in global markets. Overall, through the collaboration, Suzuki plans to leverage Toyota’s strengths in electric and hybrid vehicle technology while Suzuki will help Toyota in small car platforms in both India and globally. Suzuki’s collaboration with Toyota involves cross-badging four of Maruti’s models, (Baleno, Vitara Brezza, Ciaz and Ertiga) to Toyota. The two OEMs also intend to jointly develop and produce products in India. Toyota, in return, would provide electrification technology to Suzuki, which mitigates one of the biggest risks for Maruti.
Earnings recovery ahead; Valuations sustainable – Initiate with BUY
In our opinion, MSIL’s unmatched distribution reach, leadership position in PV segment and supply chain efficiency will help it sustain industry leading growth and improve its return ratios. MSIL’s superior scale and extensive reach gives the company an edge over its peers to cater to a wider audience. MSIL has been leading the recovery in 4W PVs which can be seen from the growth in month on month numbers. At the CMP, the stock is trading at 21.6x FY23E earnings. We initiate coverage on the stock with a BUY rating and a Target price of Rs. 7,920, valuing it at 25x of its FY23E P/E ratio resulting in an upside of 16% from current levels.
Key Financials (Standalone)
(Rs. Cr) FY20A FY21E FY22E FY23E
Net Sales 75,611 68,950 86,148 97,057
EBITDA 7,345 6,461 10,862 12,824
EPS (Rs.) 188.2 163.8 269.1 316.8
ROE (%) 11.7 9.7 14.9 16.0
ROCE (%) 11.7 9.7 14.8 15.9
PER (x) 36.6 42.1 25.6 21.8
P/BV 4.3 4.1 3.7 3.4
EV/ EBITDA 28.4 32.2 19.0 16.1
Source: Company, Axis Research
CMP as of October 19, 2020)
CMP (Rs) 6,851.60
Upside /Downside (%) 16%
High/Low (Rs) 7,755/ 4,002
Market cap (Cr) 206,895
Avg. daily vol. (6m) Shrs. 323,544
No. of shares (Cr) 30.2
Shareholding (%)
Dec-20 Mar-20 Jun-20
Promoter 56.2 56.3 56.3
FIIs 23.2 21.6 21.5
MFs / UTI 6.0 7.1 7.3
Banks / FIs 9.4 9.2 9.3
Others 5.2 5.8 5.6
Financial & Valuations
Y/E Mar (Rs. Cr) FY21E FY22E FY23E
Net Sales 68,950 86,148 97,057
EBITDA 6,461 10,862 12,824
EPS (Rs.) 163.8 269.1 316.8
ROE (%) 9.7 14.9 16.0
ROCE (%) 9.7 14.8 15.9
PER (x) 42.1 25.6 21.8
P/BV 4.1 3.7 3.4
EV/ EBITDA 32.2 19.0 16.1
Key Drivers (%) (Growth in %)
Y/E Dec FY21E FY22E FY23E
Net Sales Growth (8.8) 24.9 12.7
EBITDA Growth (12.0) 68.1 18.1
Net Profit Growth (13.0) 64.3 17.7
Axis vs Consensus
EPS Estimates 2021E 2022E 2023E
Axis 163.8 269.1 316.8
Consensus 154.6 248.0 268.6
Mean Consensus TP (12M) 6,797
Relative performance
Source: Capitaline, Axis Securities
40
60
80
100
120
Oct-19 Apr-20 Oct-20
Maruti Suzuki India Ltd Sensex Index
Darshan Gangar Research Associate
Email: [email protected]
2
Story in Charts
Exhibit 1: Trend in Volume and Volume Growth Exhibit 2: We expect 9% Revenue CAGR over FY20-23E
Source: Company, Axis Securities,
Exhibit 3: EBITDA & EBITDA Margins to improve going forward Exhibit 4: Net Profit & Net Profit Margins to return to normal in FY22/FY23
Source: Company, Axis Securities,
Exhibit 5: Trend in Net Average Selling Prices Exhibit 6: MSIL’s FY20 Portfolio Mix
Source: Company, Axis Securities,
25%
-11%
3%
-1%
12% 11% 10%
13%
5%
-16% -13%
25%
12%
-30%
-20%
-10%
0%
10%
20%
30%
0
500
1,000
1,500
2,000
Volumes (000') (LHS) Growth % (YoY) (RHS)
24%
-3%
23%
0%
14% 17%
18%
17%
8%
-12% -9%
25%
13%
-20%
-10%
0%
10%
20%
30%
0
200
400
600
800
1,000
1,200
Net Sales (Rs Bn) (LHS) Growth % YoY (RHS)
8.5%
5.7%
8.6%
10.8%
12.0%
15.9% 15.3% 15.2%
12.8%
9.7% 9.4%
12.6%
13.2%
0.0%
4.0%
8.0%
12.0%
16.0%
20.0%
0
20
40
60
80
100
120
140
EBITDA (Rs Bn) (LHS) EBITDA Margin (%) (RHS)
6.4%
5.1% 5.9%
7.0% 7.8%
9.6% 10.9%
9.7% 8.8%
7.5% 7.2%
9.4%
9.9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
20
40
60
80
100
120
Net Profit (Rs Bn) (LHS) Net Profit Margin (%) (RHS)
284 306 357 363 371 390
423 436 443 456 481 486 491
1%
8%
17%
2% 2%
5%
8%
3%
2% 3%
5%
1% 1%
0%
5%
10%
15%
20%
0
100
200
300
400
500
600
Realizations ('000/unit) (LHS) Growth % YoY (RHS)
Alto; 12.2
Baleno; 13.1
Celerio; 4.0 Ciaz; 1.6 Dzire; 11.5
Eeco & Omni; 7.6
Gypsy, Ertiga, 5.8
Ritz/ Ignis; 1.3
Swift; 12.0
SX4 (includes SX4 cross); 0.7
Wagon R; 10.0
Vitara Brezza; 7.1
XL6; 1.4 S-Presso; 3.6
Light Commercial Vehicle; 1.4
Exports; 6.5
3
Industry Overview
The auto industry was already facing a lot of challenges even before the onset of COVID-19 pandemic. FY2019-20 began amid
considerable challenges with sluggish economic growth in India and across the world. In India, the issue of inadequate credit availability,
driven by challenges in the financial sector was one of the important reasons for moderate economic expansion. Consequently, the
slowdown in consumption affected the overall demand environment. Therefore, a combined impact of muted demand in the domestic and
export markets dragged down capacity utilisation of industries and dried up fresh investments. To bolster the economy, the Government
of India took some bold measures like reducing corporate tax rates and offering credit guarantee for financially sound Non-Banking
Financial Companies (NBFCs). The year also witnessed considerable easing of monetary policy by the Reserve Bank of India (RBI) with
reduction in the repo rate to the tune of 185 basis points. With significant fiscal and monetary measures, the economy started to show
early signs of improvement in the later part of FY 2019-20. However, at the end of the year, the outbreak of COVID-19 brought the
economy to a screeching halt.
For the auto sector, FY2019-20 can best be summarized as the year when all negative factors struck simultaneously with full force. Over
the last two decades, the auto industry hasn’t witnessed such a huge demand contraction. The slowdown was broad-based with all the
segments of auto industry witnessing significant decline. In line with the degrowth in sales in the domestic passenger vehicle (PV) market
(-18%), sales volume of the Company in the PV segment declined by 18.1%. We expect the Passenger Vehicle (PV) industry to decline
further by ~13% in FY21E on account of Covid-19 disruption followed by a strong recovery of ~23% and ~11% in FY22E and FY23E
respectively on the back of low base of two years, pent-up demand, preference for personal mobility and healthy economic recovery.
Exhibit 7: Domestic PV Industry Volume Trend
Source: Company, Axis Securities,
The key factors that affected the demand of passenger vehicle industry can be summarized as follows:
Increase in selling prices on back of Regulatory changes affected the affordability of owning a car
Increase in selling price especially of entry level cars affected the affordability to own a car. The cost of acquisition of cars increased due
to simultaneous convergence of multiple factors, including (1) implementation of various product regulations such as Mass emission
regulation (BSVI), and Safety regulations (Frontal-Offset, Pedestrian safety, Airbag, ABS etc.); (2) Increase in road tax in some states and
(3) Increase in vehicle insurance premiums. Due to these factors the car prices, especially of those in the entry segment, saw a sharp rise
to the tune of ~20%. This increase, along with subdued economic growth adversely impacted the affordability of cars and consequently
car demand.
Issues related to vehicle financing
With financiers getting more cautious in lending, both dealers as well as customers faced the issue of credit availability. Moreover, a
reduction in the Loan-to-Value (LTV) ratio led to an increase in the down payment amount. The total upfront payment, which a customer
needs to incur at the time of vehicle purchase, further rose due to an increase in insurance premiums and road taxes. Given the fact that
over 80% of company’s cars are sold on finance, the issues in vehicle financing considerably affected the overall sales.
Uncertainties in the mind of customers
With significant degrowth of car sales in the starting months of the financial year (on account of general elections), there was a strong
anticipation of GST rate cut leading to customers deferring purchases. Much discussion around Electric Vehicles (EVs) made customers
wait for EVs without knowing much about the price and challenges related to charging infrastructure. Some customers were not sure
whether to buy BSIV or BSVI cars. While BSIV cars had a cost advantage, they felt BSVI cars would be technologically superior and
command high resale value. Customers were also doubtful that a government or court ruling may render BSIV cars obsolete even before
the useful life of the car. These factors further contributed to postponement of already weak demand.
3% -5%
5% 7% 9% 8%
3%
-18%
-13%
23%
11%
-30%
-20%
-10%
0%
10%
20%
30%
0
1,000
2,000
3,000
4,000
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Volumes (000') (LHS) YoY Growth (%) (RHS)
4
Disruption due to COVID-19
The demand for cars usually remains good in March. The unprecedented COVID-19 outbreak led to a nationwide shutdown of economic
activity. The lockdown from the 25th March 2020 led to disruption of the sale plans of all companies as the last week of March is always
important. There could be no production in April and in May 2020 production was on a very limited extent because of the need to comply
with all regulations and to ensure the safety of employees and customers. The production in the month of June was better and things
have started improving gradually over the last 2-3 months.
The supply side constraints which hampered production and kept the utilization levels low across OEMs have been easing and the
capacity utilization has been improving sequentially. Rural economy was less impacted from the effects of COVID-19 as compared to
urban centers, and thus led the recovery in demand. Initially, the sales were driven by the pent-up demand and preference for personal
mobility but as the year is progressing by, the demand seems sustainable. Month on month sales reached around 85-90% of pre-covid
levels in August (albeit on a low base of last year) while many OEMs reported a YoY growth in the month of September.
We expect the demand to remain robust till the festive season post which we expect a marginal contraction in Q4 on account of subdued
economic environment, lower income levels and discretionary nature of the product. We expect the Passenger Vehicle (PV) industry to
decline by ~13% in FY21E followed by strong recovery of ~23% and ~11% in FY22E and FY23E respectively.
Our Investment Thesis is based on the following premises
Well positioned to benefit from demand recovery
Amidst a wider consumption slowdown, liquidity crunch and transition to stringent BS-VI emission norms, FY20 was a challenging year for
the Indian automobile industry. The situation was further aggravated due to the spread of Coronavirus across India and overseas markets
in the last quarter of the fiscal. Consequently, MSIL's sales volume declined by ~18% in FY20 in line with the decline in overall passenger
vehicle (PV) market. Despite the slowdown in demand and aggressive growth by new overseas entrants, especially in the sports utility
vehicle (SUV) segment, MSIL retained its stronghold in the Indian PV market and maintained its overall market share at ~51% in FY20,
supported by its strong brand, extensive product portfolio, wide distribution network and pro-activeness in introduction of BS-VI models
well in advance.
As supply side issues have gradually started normalizing, production is expected to inch closer to normal levels. We expect Company to
be able to operate at close to 85-90% utilization in the coming months. Demand in rural areas has gained momentum. Rural incomes
have been aided by higher yields and MSPs for Rabi harvest. Above average monsoon and higher acreage for Kharif crop have led to
positive sentiments in rural/agri economy, which otherwise has been relatively insulated from Covid impact as well. Moreover, urban
areas are also witnessing pick up post the unlocking of economy. The festival of Ganesh Chaturthi and Onam saw growth in numbers
over last year.
Exhibit 8: PV Industry MoM sales Trend
Source: Company, Axis Securities,
After reeling under a stressful first five months of FY2021, the auto industry finally seems to be coming back on track in September 2020,
with most of the auto OEMs reflecting their sales in green with a double digit growth in September 2020. Halfway through this year, sales
have increased on a sequential basis and September has witnessed the best performance so far. This may be attributed to the pent-up
demand, preference for personal mobility, gradual opening up of the economy, easing of supply chains, labour availability, excitement of
new launches and pushing up of stocks at dealerships, with high expectations of the upcoming festive season.
Retail demand has reached almost 85-90% of pre-COVID levels based on parameters like enquiries, bookings, etc. Demand, although is
improving, it could get hit by sporadic lockdowns in some cities/states, leading to closing down of dealerships. Company witnessed its
share of first time buyers go up by 500-600 bps (to 50-51%), while share of replacement buyers has declined to ~16-17% from ~24-25%.
MSIL has also launched numerous schemes to boost financing. Some of these were not available in the normal course of business.
234 227 210
190 189 215
-
34
106
183
216
272
0
50
100
150
200
250
300
Apr May June July Aug Sep
PV Industry monthly volumes (in 000')
FY 2019-20 FY 2020-21
5
In our opinion, MSIL could emerge as the biggest beneficiary of demand recovery in the post-COVID era, considering its stronghold in the
entry-level segment and a favorable product life cycle. MSIL’s new launches, targeted at filling the gaps in its portfolio, are likely to
improve the overall product mix. We believe MSIL would gain further market share, driven by an expected shift toward petrol vehicles,
coupled with an improved product mix and reduced discounts. All business parameters such as industry consolidation, market share
improvement, reduced JPY exposure, and improving share of premium products, have improved MSIL’s positioning considerably over the
recent years.
Preference for Personal Mobility and Down-trading Trend
Demand for mobility is picking up as restrictions are eased. Aversion to public transport / shared mobility has fuelled demand for personal
vehicles (2W or 4W). Much of these purchases are expected to be in the entry level segment where Maruti has much higher market
share. With lower income and job losses, down-trading is expected. Current data (in terms of enquires) indicates that there is a spike in
demand for smaller cars.
Preference for personal transportation to ensure social distancing is leading the recovery in urban demand. This demand is also aided by
higher savings accrued over past several months, owing to ‘work-from-home’. Moreover, consumers are preferring entry-level cars in
difficult times of COVID-19. Maruti, having a stronghold over the entry-car segment, is likely to benefit from the trend .We expect full-
fledged recovery in FY2022 & FY2023, driven by normalization of economic activities and pent-up demand (PV volumes have been under
pressure for the past six to seven quarters). Share of first time buyers for the Company has gone up to 51-52% (from 46-47% earlier).
Also, share of additional buyers has increased. The trend of customers moving towards compact cars, not necessary entry level cars, is
visible. However, we donot see any material impact on blended margins due to this.
Maruti Suzuki reported a total sales of 1.6L units in Sept’ 20 marking a growth of 31% on YoY basis and 29% on MoM basis. The key
growth drivers were Mini & Compact segment with volumes up 36% & 47% YoY respectively. Sustained demand recovery and higher
channel filling of inventory in anticipation of high sales volumes during the Festive season helped Company post robust volume growth.
While PV industry is exhibiting a strong sequential recovery, it is difficult to ascertain how far the same is a function of the gradual easing
of restrictions and the result of pent-up demand. However, witnessing the sustainability of the demand over last 2-3 months gives
confidence that demand will continue to remain robust as we advance towards the festive season. We expect MSIL to gain market share
in FY2021E given its (1) higher presence in rural areas (rural demand witnessing faster recovery), (2) a wide distribution network, (3)
preference for lower-end hatchback cars (MSIL is the leader) given the weak economic environment and (4) expected shift towards petrol
vehicles.
Suzuki-Toyota collaboration to mitigate EV risk
Toyota Motor Corporation and Suzuki Motor Corporation have signed an agreement regarding a capital alliance to establish and promote
a long-term partnership and to promote collaboration in new fields, including autonomous driving. Toyota and Suzuki have announced a
roadmap for collaboration between the two companies in India as well as global markets. Overall, through the collaboration, Suzuki plans
to leverage Toyota’s strengths in electric and hybrid vehicle technology while Suzuki will help Toyota in small car platforms in both India
and globally. Suzuki’s collaboration with Toyota involves cross-badging four of Maruti’s models, (Baleno, Vitara Brezza, Ciaz and Ertiga)
to Toyota. The collaboration could potentially eat into some of Maruti's sales in coming years, although share of small-car Baleno
volumes for Maruti has remained largely unchanged despite cross-badging. The two OEMs also intend to jointly develop and produce
products in India. Toyota, in return, would provide electrification technology to Suzuki, which mitigates one of the biggest risks for Maruti.
The partnership between the two companies is very unique as it provides competitiveness to each other and also strength by allowing
both partners to enter segments where they have not yet been present.
The Toyota and Suzuki partnership has already seen the launch of the Toyota Glanza, which is essentially a rebadged Maruti Suzuki
Baleno. Toyota recently launched its 2nd car under the partnership, a new compact SUV Urban Cruiser which is based on Maruti’s Vitara
Brezza. The alliance will also see Maruti Suzuki supplying the Ciaz and the Ertiga to Toyota. The two Japanese carmakers will also make
a big push for hybrid electric vehicles in the country with Toyota supplying its hybrid systems to Suzuki. Additionally, they will cooperate to
develop a new Toyota C-segment MPV that will be supplied to Suzuki as well.
Despite a few launches by Hyundai and MG in recent quarters, we believe the risk from Electric Vehicles (EVs) to the Indian PV industry
is relatively low over the next 3-5 years, as in our opinion EVs will be adopted first in 2Ws, followed by 3W and CVs and lastly in the PV
space. In our opinion, Maruti, Suzuki and Toyota are betting on hybrids going forward. Unlike pure electrics, where Suzuki-Toyota are
lagging many global OEMs, Maruti is well placed with hybrids as Suzuki has its own hybrid technology and is also working to adapt the
Toyota Hybrid System (THS) for Indian pricing and conditions. As a result, Maruti has been lobbying the government for tax incentives
and a more accommodative stance on hybrids – currently pure electric vehicles attract a much lower GST of 5% vs. 28%+ for ICEs, but
there is no differential taxation for hybrids. A more benign government policy towards hybrids would be a key positive for Maruti in our
view. A phase of hybrid in India would buy Maruti Suzuki more time to gradually develop technology and products for a shift towards pure
electric; it would also help counter any disadvantage from a shift to emission-based taxation.
6
Portfolio Shift from Diesel to Petrol
Few years ago when diesel cars were in demand due to the huge price gap between petrol and diesel, MSIL had introduced diesel
variants for almost all its models. Company has now discontinued it’s diesel models as the gap has shrunk. MSIL’s petrol diesel mix was
80:20 in FY20. Post which Company has stopped manufacturing diesel models resulting in a 100% Petrol portfolio from FY21. Demand
for diesel vehicles has dropped sharply in the April-August 2020 period. In cars (from 14% to 2%), UVs (from 74% to 44%) and vans
(from 16% to 3%) compared to last year sales. Conversely, demand for petrol vehicles has risen in the April-August 2020 period. In cars
(from 86% to 98%), UVs (from 26% to 56%) and vans (from 84% to 97%) compared to last year sales. There is no longer a fight between
diesel and petrol. Demand for diesel-engine PVs has slid from 40% in FY2017 to 19% in April-August 2020, while that of petrol has
jumped from 60% to 81%.
To further amplify confusion in the consumer purchasing decision, rulings such as a 10-year lifetime of a diesel car in the National Capital
Region (NCR) compared to 15-year validity for petrol cars, as well as the higher maintenance cost of a complex BS-VI diesel vehicle over
its petrol counterpart, has turned many potential diesel car buyers into fence-sitters and is eventually making them opt for the safer choice
of petrol. Given the high cost of acquisition, very low pricing disparity, similar running cost of petrol and diesel (at ~INR4/km), economic
viability of diesel cars has dipped particularly in small and mid-segment. The market, at present, seems to favour smaller hatchbacks and
petrol and CNG cars. In our opinion, Maruti having moved out of its diesel portfolio, stands to benefit from this shift.
Exhibit 9: Shift from Diesel to Petrol (in %) - PVs
Source: Company, Axis Securities,
Dominant Position in the domestic PV market
MSIL is the market leader in the domestic passenger vehicles segment with a ~51% market share in FY20 in terms of units sold. Its
models have consistently featured in the list of top 10 car models sold in the country. In FY20, MSIL had 7 models in the list of top 10
models sold during the year. The company has been introducing products as per the market requirements. Cars of the company are well
received by the market due to value for money image, lower maintenance costs and wide service network along with good resale value
as compared to peers.
MSIL has a decent product pipeline, which will help it to counter competition from new entrants and maintain its leadership position.
Some of the expected launches are Jimny, Wagon R electric, Futuro-e, Grand Vitara, XL5, 800cc small engine model etc. Besides the
company would continue to facelift and introduce CNG variants of existing models in order to bridge the gap from diesel model
discontinuation. Success of existing models, combined with expanding product portfolio and acceptance of its BS-VI models has solidified
its dominant market position.
Exhibit 10: Market Share trend for MSIL in the PV Segment (in %)
Source: Company, Axis Securities,
40% 40% 36% 29%
19%
60% 60% 64% 71%
81%
0%
20%
40%
60%
80%
100%
FY17 FY18 FY19 FY20 Apr-Aug 20
Shift from Diesel to Petrol (in %) - PVs
Diesel (%) Petrol (%)
38.5 39.4 42.1 45.0 46.8 47.4 50.0 51.2 51.0 48.2
0
10
20
30
40
50
60
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 H1FY21
MSIL Hyundai Tata motors MM Toyota Honda
7
Focus on gaining market share in the SUV segment
Of the 48 new model launches that India’s passenger vehicle market has seen since the beginning of the current calendar year, half are
SUVs. There has been a steady rise in the preference for SUVs by customers in India in recent years. The trend has prompted
automobile firms to drive in new models, loaded with features at competitive price points. MSIL presently sells models including the Vitara
Brezza, Ertiga, and S-Cross in the SUV segment, but is facing competitive pressures from Korean rivals Hyundai and Kia.
MSIL plans to introduce a slew of new sport utility vehicle (SUVs) models over the next couple of years as it seeks to straddle the
segment with multiple product offerings at varied price points. The company is planning to launch 5 new SUVs – one every six months till
2023. The first model will be a new multi-purpose vehicle (MPV) being co-developed with Toyota (Suzuki’s alliance partner). The model
will also wear a Toyota badge. This will be followed by the new Vitara Brezza in the first half of 2022. The second half of 2022 will see the
launch of a mid-sized SUV that will compete with the Hyundai Creta and Kia Sonet. A crossover model to compete with Tata Nexon will
also go on sale in the second half of 2022. The first half of 2023 will witness a Made In India Jimny.
Suzuki Motor is planning to make India the exclusive production hub for a five door variant of the Jimny SUV. Suzuki Motor plans to make
a 3 door variant and a new 5 door variant Jimny – both using mostly locally-sourced components in India by 2022-23. India would be the
only production hub for the 5 door model. The new Jimny is expected to replace 4x4 Gypsy, a preferred choice for many govt agencies,
Indian Army and police in India. This move is a part of the portfolio building for India, which caters to the exports market. MSIL wants to
grow its exports share in production to 20% from 7% at present. The locally assembled Jimny is expected to boost MSIL’s SUV portfolio,
and aid the company in arresting a decline in its market share in the UV space.
Exhibit 11: Trend in MSIL’s product/ volume mix over the years (in %)
Source: Company, Axis Securities,
Launch of Vehicle Subscription Program
Carmakers have turned to subscription programs to draw in buyers during these testing times. Leading automobile manufacturers in India
including Maruti Suzuki, Hyundai Motor India, Mahindra & Mahinda (M&M) and Toyota Kirloskar Motor are extending zero down payment
vehicle leasing options to customers, as they look to shore up volumes in a downbeat market. Passenger Vehicle Sales in India are
estimated to have declined by 34% in the six months to September, compelling carmakers to look at new ways of stimulating demand. In
India, where pride of ownership has traditionally driven vehicle sales, leasing is still at a nascent stage, but with more mi llenials opting for
ride-sharing options, automakers feel there has been a shift in mindset.
MSIL has launched its vehicle subscription program, ‘Maruti Suzuki Subscribe’, for individuals in Delhi, NCR region (Noida, Ghaziabad,
Faridabad, Gurugram) and Bengaluru. The company plans to roll out this program in up to 60 cities in the next two to three years. The
company has partnered ORIX Auto Infrastructure Services India, a subsidiary of ORIX Corporation, Japan, to
launch Maruti Suzuki Subscribe for these cities. Through this service, customers can choose to subscribe to a new Swift, Dzire, Vitara
Brezza and Ertiga from Maruti Suzuki ARENA and new Baleno, Ciaz and XL6 from NEXA. Customers have an option to choose the
variant as well as colour of their liking.
‘Maruti Suzuki Subscribe’ allows customer to use a new car without actually owning it and by paying an all-inclusive monthly fee that
comprehensively covers complete maintenance, insurance and roadside assistance. Customers can select subscription duration ranging
from 12 months to 48 months and pay a monthly subscription charge starting Rs 14,463 (including taxes) for Swift Lxi in Delhi for a tenure
of 48 months. After the completion of subscription tenure, the customer can also opt to upgrade the vehicle, extend, or buy the car at
market price.
Under Maruti Suzuki Subscribe, a customer can choose white number plate for which the vehicle will be registered in her/his name or
black number plate with the vehicle registered in the name of ORIX. Vehicle subscription market is new to India and as such offers a
huge untapped potential. While Passenger vehicle leasing has penetration of less than 1% in India, it is as high as 45% in developed
nations. In our opinion it will take time for this concept to become popular, but it has the potential to change the landscape of car usage
going ahead.
76% 75% 74% 77% 75% 75% 70% 69% 69% 69% 70% 71% 70%
13% 13% 9% 9% 10% 10% 10% 9% 10% 8% 7% 6% 6%
0% 1% 7% 5% 5% 7% 12% 14% 14% 15% 15% 16% 16%
11% 11% 10% 9% 9% 9% 8% 7% 6% 7% 6% 6% 6%
0%
20%
40%
60%
80%
100%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Passenger Cars MPV (Vans) Utility Vehicles LCV (Super Carry) Exports
8
Strong Financial Profile
MSIL has maintained its strong financial risk profile with a net worth in excess of Rs 50,000 crs and liquidity of over Rs 37,000 crs as of
FY2020. The company has a strong cash generating ability and negligible debt levels. With the contract manufacturing arrangement with
Suzuki Motor Gujarat (SMG) Pvt Ltd, its cash flows can fund the capital expenditure and working capital needs. Financial flexibility is
further enhanced by largely unutilised bank lines of Rs 3,000 crs. Due to the strong liquidity, MSIL is able to provide financial support to
its dealer and vendors to tide over the challenging business environment. Company has maitained stable return ratios over the years. We
expect company’s ROE and ROCE to drop in FY21E but return back to normal levels in FY22E & FY23E as the overall outlook improves.
Exhibit 12: ROE Trend Exhibit 13: ROCE Trend
Source: Company, Axis Securities,
Maruti’s Twin Distribution Model – a key differentiator providing competitive edge to the Company.
Maruti uses a twin distribution model and sells it cars under 2 brands – ‘Arena’ and ‘Nexa’. MSIL completely transformed its regular retail
network and rebranded the outlets for volume models (with an average ticket size of ~ Rs 6 lakhs) as ‘Arena’. Maruti Suzuki ARENA was
launched to meet the expectations of a modern, dynamic and young audience. It now sports a modern and trendy look. It offers a warm,
friendly and comfortable environment to its customers. Maruti differentiated Arena from the rest of the platform through digital integration
at the time. Driven by the idea of providing a tailor-made experience, customers are provided with a seamless offline to online transition,
from showrooms to the intuitive and streamlined website that averages ~6.5 million visits a month. At showrooms, the touch-screen
navigation portal remembers customer preferences and the customization options offered by i-Create allow customers to design the car.
Customers’ experiences are further enhanced by the friendly and helpful Relationship Managers, Owner’s Lounge and a Cafe
Consultation Zone, once again reinforcing Maruti Suzuki’s determination to serve their customers well and effectively. At present, there
are 2,390 Arena showrooms across 1,964 cities in India.
Exhibit 14: MSIL’s Arena Portfolio
Source: Company, Axis Securities,
The launch of ‘Nexa’ Brand in 2015 marked MSIL’s entry into the premium retail format. The move was an attempt to break from its
traditional small-car mold and make its presence felt in the growing premium segment. Maruti’s brand Nexa completed its 5 years of
operations in 2020. ‘Nexa’ brand commands a little over 11 per cent of the car market volume and contributes more than 20 per cent of
Maruti's annual volumes, grossing over 30,000 units per month even in this downturn. Nexa has become the third largest automobile
retail brand in five years since inception in July 2015, is arguably one of the best examples of how customer-centricity can create a
premium brand. Over this period, Nexa dealer network has sold over ~1.1 million cars.
17.8%
12.2%
14.9%
15.0%
16.7% 20.2%
21.5% 19.2%
16.6%
11.7%
9.7%
14.9% 16.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
ROE (%)
17.1%
11.8%
14.5%
14.3% 16.3%
20.0% 21.3% 19.4%
16.5%
11.7%
9.7%
14.8%
15.9%
0%
5%
10%
15%
20%
25%
ROCE (%)
9
Since the launch with the sole brand S-Cross, today Nexa sells five premium models of Maruti. In October 2016, it rolled in the Baleno,
the premium mini SUV, which was followed by the Ignis, a hatchback in January 2017. In April 2017, it launched the premium sedan Ciaz,
and in August 2019 the XLB, a crossover MPV, was rolled out. At present, there are 375 Nexa showrooms across 219 cities.
For the brand Nexa, the first step was to tap the fast evolving market wherein market research has established that driven by rising
income levels, many were looking forward to a more customer-centric and a prersonalised experience in car-buying. Nexa helped Maruti
in precisely addressing that experience. Having established a digital connect, MSIL currently is focusing on a connected digital CRM
experience with initiatives such as social CRM and to digitise the entire process of car-buying, it is making financing also online. Already,
21 of the 26-steps in the car-buying process have been digitised and a pilot for a one-of-its-kind digital finance marketplace that assists a
customer in her car-buying process by providing easy finance is underway now. To drive the customer experience to the next level MSIL
has introduced Nexa Music under which it creates new original English music; Nexa Lifestyle wherein it creates avant garde lifestyle; and
Nexa Journeys under which offers unique travel experience to customers.
Exhibit 15: MSIL’s Nexa Portfolio
Source: Company, Axis Securities,
Exhibit 16: MSIL’s extensive Sales Network
Source: Company, Axis Securities,
1,310
1,619 1,820
2,020 2,121 2,264
2,390
127 252 316 360 375
0
1,000
2,000
3,000
FY14 FY15 FY16 FY17 FY18 FY19 FY20
MSIL's Sales Network (Nos)
Arena Nexa
10
Company Overview
The Company was established in 1981. A joint venture agreement was signed between the Government of India and Suzuki Motor
Corporation (SMC), Japan in 1982. The Company became a subsidiary of SMC in 2002. In terms of production volume and sales, the
Company is now SMC’s largest subsidiary. SMC currently holds 56.37% of its equity stake. Maruti Suzuki India Limited is the market
leader in the PV segment, commanding a market share of about 50%.
The Company has two state-of-the-art manufacturing facilities located in Gurugram and Manesar in Haryana, capable of producing ~1.5
million units per annum. Suzuki Motor Gujarat Private Limited (SMG), a subsidiary of SMC, was set up in Hansalpur, Gujarat to cater to
the increasing market demand for the Company’s products and has been operational since 2017. Through this new facility, an
additional annual production capacity of 0.5 million units has been made available, thereby taking the combined production capability to
~2 million units.
MSIL currently has 17 models with over 150 variants across segments. These include (i) the mini segment: Alto and S-Presso; (ii) the B
(compact) segment: Wagon R, Swift, Celerio, Ignis, Dzire, Tour S and Baleno; (iii) the D (mid-sized) segment: Ciaz; (iv) the vans
segment: Eeco; (v) the SUV segment: Gypsy, Ertiga, S-Cross, Brezza & XL6; and (vi) the LCV segment: Super Carry.
11
Valuations and Outlook
MSIL, in our opinion could emerge as the biggest beneficiary of demand recovery in the post-COVID era, considering its stronghold in
the entry-level segment and a favorable product life cycle. MSIL’s new launches, targeted at filling the gaps in its portfolio, are likely to
improve the overall product mix. Company has defended its dominant franchise and improved its brand acceptability over the years
through new launches and innovative sales strategies. MSIL’s unmatched distribution, leadership postion in PV segment and supply
chain efficiency will help it sustain industry leading growth and improve its return ratios. MSIL’s superior scale and extensive reach
gives the company an edge over its peers to cater to a wider audience. Company has been leading the recovery in 4W PVs in FY21
which can be seen from the growth in month on month numbers. We expect the company to register Revenue/Ebitda/PAT CAGR of
9%/20%/19% from FY20-FY23E driven by volume CAGR of 6.5% over FY20-23E. We initiate coverage on the stock with a BUY rating
and a Target price of Rs. 7,920, valuing it at 25x of its FY23E P/E ratio resulting in an upside of 16% from current levels.
Exhibit 17: Forward PE Chart (x) Exhibit 18: Forward PE Band (x)
Source: Company, Axis Securities
Key Risks
Subdued economic environment on account of prolonged Covid-19 pandemic
Automobiles come under discretionary purchases, especially the 4W segment. Prolonged COVID-19 infection can weaken consumer
sentiments and delay normalcy in demand. People might consider delaying their purchases and instead focus more on essentials and
savings. MSIL being a market leader in entry-level vehicles, the impact might be less severe as compared to its competitors but still
poses a risk to our volume estimates.
Susceptibility of profitability and market share to intense competition and business cycles
The Indian PV market remains highly competitive, with existing and new players launching new models regularly, especially in the
compact and mid-size segment. The number of players in this segment increased to 19 in fiscal 2020 from 7 in fiscal 2008. With more
players and models vying for a share of the growing pie, competition in the domestic PV market will intensify. Despite having a
presence in the segment for many years, MSIL’s share in UVs has been poor. This segment is witnessing higher growth than the entry
and sedan segments with. There is intense competition from Hyundai, M&M, Kia Motors, MG Motors, Tata Motors, Toyota Kirloskar
Motor, etc. MSIL’s new product launches in the SUV segment and their performance will remain a key monitorable going forward.
Significant increase in Raw Material prices
Raw material prices constitute ~65-70% of the selling price. Although commodity prices were at lower levels due to lack of demand, the
prices have been increasing. A sharp spike in prices of key raw materials like steel and aluminium can hurt margins and will be a
downside risk to our margin estimates.
5
15
25
35
45
55
Mar-
15
Sep
-15
Mar-
16
Sep
-16
Mar-
17
Sep
-17
Mar-
18
Sep
-18
Mar-
19
Sep
-19
Mar-
20
Sep
-20
Marui Suzuki 1Y Fwd PE Chart
Mean Mean+1Stdev Mean-1Stdev PE
0
4000
8000
12000
Mar-
15
Jul-
15
No
v-1
5
Mar-
16
Jul-
16
No
v-1
6
Mar-
17
Jul-
17
No
v-1
7
Mar-
18
Jul-
18
No
v-1
8
Mar-
19
Jul-
19
No
v-1
9
Mar-
20
Jul-
20
Maruti Suzuki 12M Fwd PE Band
Price 10x 20x 30x 40x
12
Financials (Standalone)
Profit & Loss (Rs Cr)
Y/E March FY20A FY21E FY22E FY23E
Net revenues 75,611 68,950 86,148 97,057
Operating expenses 68,266 62,489 75,286 84,233
EBIDTA 7,345 6,461 10,862 12,824
EBIDTA margin (%) 9.7 9.4 12.6 13.2
Other income 3,421 3,493 3,838 4,062
Interest 133 94 102 105
Depreciation 3,526 3,261 3,735 3,992
Profit Before Tax 7,065 6,598 10,864 12,789
Tax 1,414 1,651 2,735 3,219
Reported Net Profit 5,651 4,947 8,130 9,570
Net Margin (%) 7.5 7.2 9.4 9.9
Adjusted Net Profit 5,685 4,947 8,130 9,570
Source: Company, Axis Securities
Balance Sheet (Rs Cr)
Y/E March FY20A FY21E FY22E FY23E
Equity capital 151 151 151 151
Reserves & surplus 48,286 50,476 55,698 60,667
Shareholders’ funds 48,437 50,627 55,849 60,818
Total Loans 171 171 171 171
Deferred tax liability 598 598 598 598
Total Liabilities and Equity 49,206 51,396 56,618 61,588
Gross block 29,196 32,886 36,274 39,774
Depreciation 13,415 16,676 20,411 24,403
Net block 15,781 16,209 15,863 15,370
Capital WIP 1,337 448 560 560
Investments 36,468 41,968 46,168 46,218
Inventory 3,215 4,109 4,950 5,539
Debtors 2,127 1,889 2,360 2,659
Cash & Bank Bal 21 655 2,165 2,214
Loans & Advances 3,603 3,828 4,516 7,864
Current Assets 8,966 10,481 13,992 18,276
Sundry Creditors 7,494 10,272 12,376 11,248
Other Current Liability 5,852 7,437 7,588 7,588
Current Liability& Provisions 13,346 17,709 19,964 18,836
Net current assets -4,380 -7,229 -5,972 -560
Total Assets 49,206 51,396 56,618 61,588
Source: Company, Axis Securities
13
Cash Flow (Rs Cr)
Y/E March FY20A FY21E FY22E FY23E
EBIT 3,819 3,199 7,128 8,831
Other Income 3,421 3,493 3,838 4,062
Depreciation & Amortization 3,526 3,261 3,735 3,992
Interest Paid (-) -133 -94 -102 -105
Tax paid (-) -1,414 -1,651 -2,735 -3,219
Extra Ord Income -42 0 0 0
Operating Cash Flow 9,176 8,208 11,864 13,562
Change in Working Capital -2,446 3,482 254 -5,363
Cash Flow from Operations 6,731 11,690 12,118 8,199
Capex -3,636 -2,800 -3,500 -3,500
Strategic investments -3,779 0 0 0
Non-Strategic Investments 3,827 -5,500 -4,200 -50
Cash Flow from Investing -3,589 -8,300 -7,700 -3,550
Change in borrowing 21 0 0 0
Others -413 0 0 -1,693
Dividends paid (-) -2,908 -2,757 -2,908 -2,908
Cash Flow from Financial Activities -3,300 -2,757 -2,908 -4,600
Change in Cash -158 633 1,511 49
Opening Cash 179 21 655 2,165
Closing Cash 21 655 2,165 2,214
Source: Company, Axis Securities
Ratio Analysis (%)
Y/E March FY20A FY21E FY22E FY23E
Revenue Growth -12.1 -8.8 24.9 12.7
EBITDA Margin 9.7 9.4 12.6 13.2
Net Profit Margin 7.5 7.2 9.4 9.9
ROCE (%) 11.7 9.7 14.8 15.9
ROE (%) 11.7 9.7 14.9 16.0
EPS (Rs) 188.2 163.8 269.1 316.8
P/E (x) 36.6 42.1 25.6 21.8
P / BV (x) 4.3 4.1 3.7 3.4
EV / EBITDA (x) 28.4 32.2 19.0 16.1
Fixed Asset Turnover Ratio (x) 4.4 4.1 5.2 6.1
Debt Equity (x) 0.0 0.0 0.0 0.0
EV / Sales 2.8 3.0 2.4 2.1
Source: Company, Axis Securities
14
About the analyst
Analyst: Darshan Gangar
Contact Details: [email protected]
Sector: Auto
Analyst Bio: Darshan Gangar is Chartered Accountant with over a year of research experience in the Mid Cap
space and Auto sector.
Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
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15
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DEFINITION OF RATINGS
Ratings Expected absolute returns over 12-18 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%
NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock