Maruti Suzuki Ltd.

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Initiating Coverage

Maruti Suzuki Ltd. 24-September-2020

Maruti Suzuki Ltd.

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Industry LTP Recommendation Base Case Fair Value Bull Case Fair Value Time Horizon

Automobile - 4wheeler Rs 6501 Buy on dips to Rs 6130-6170 band and add further

in Rs 5615-5635 band Rs 6790 Rs 7200 2 quarters

Our Take:

Maruti Suzuki is the undisputed market leader in the Indian passenger vehicle industry and is likely to remain so in the near future. Over the last 5 years it has further consolidated its leadership position with its market share increasing from 45% in FY15 to 51.9% in FY20 driven by its large sales network, lower service cost and higher resale value. The recent Covid-19 pandemic could also prove beneficial for the company as many people would prefer personal mobility over public transport. Also, in the post Covid era, there is strong likelihood of down trading in the PV segment, MSL’s dominant presence in small and medium car segment can augur well for the company. Apart from this, in long term lower penetration of 4W in India, increasing discretionary spend and rising aspirations among the youth are likely to be beneficial for MSIL. MSIL has been launching new models both in the premium category as well as entry level small cars. Its premiumisation strategy, by creating a separate service brand through NEXA, has paid off well and improving product mix has led to increase in ASP (Average selling price). Its global alliance with Toyota could provide volume growth while MSIL would benefit from the hybrid technology of Toyota as the industry moves from combustion engines to hybrid/electric vehicles. Strong support from the parent Suzuki Motor Corp Japan in terms of technology and contract manufacturing helps the company in improving margins and conserve cash. Seasonal sales boost (coupled with low inventory levels at dealers), higher rural demand due to higher yields and high MSPs, and normalcy returning to J&K where MSIL has a 65%+ share are some triggers that may play out in the near term.

Valuations & Recommendation: Although we expect sales volume to decline at CAGR of 2% over FY20-FY22, cost cutting initiatives, higher other income and improving product mix towards premium models is likely to result in strong EBITDA/PAT growth. We feel the base case fair value of the stock is Rs 6790 (26.0x FY22E EPS) and bull case fair value is Rs 7200 (27.5x FY22E EPS). Investors can buy the stock in the price band of Rs 6130-6170 band (~23.5x FY22E EPS) and add further on declines to Rs 5615-5635 band (21.5x FY22E EPS).

HDFC Scrip Code MARSUZ

BSE Code 532500

NSE Code MARUTI

Bloomberg MSIL IN

CMP Sep 23, 2020 6501.3

Equity Capital (cr) 151.0

Face Value (Rs) 5

Eq. Share O/S (cr) 30.2

Market Cap (Rs cr) 196391.3

Book Value (Rs) 1658.8

Avg.52 Wk Volume 13,80,000

52 Week High 7758.7

52 Week Low 4001.1

Share holding Pattern % (Jun, 2020)

Promoters 56.28

Institutions 38.53

Non Institutions 5.19

Total 100.0

Fundamental Research Analyst Atul Karwa atul.karwa@hdfcsec.com

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Financial Summary

Particulars (Rs cr) Q1FY21 Q1FY20 YoY-% Q4FY20 QoQ-% FY19 FY20 FY21E FY22E

Total Operating Income 4,107 19,720 -79.2 18,199 -77.4 86,020 75,611 63,079 74,418

EBITDA -863 2,048 NA 1,546 NA 10,999 7,303 5,172 8,975

APAT -249 1,436 NA 1,292 NA 7,501 5,651 4,407 7,899

Diluted EPS (Rs) -8.3 47.5 NA 42.8 NA 248.4 187.1 145.9 261.5

RoE-% 17.1 11.7 8.4 13.5

P/E (x) 26.2 34.7 44.6 24.9

EV/EBITDA 14.6 21.4 29.5 16.0 (Source: Company, HDFC sec)

Recent Triggers Q1FY21 financials MSIL reported a loss of Rs 249cr in Q1FY21 impacted by COVID and constrained production. Operating income dropped by 79.2% yoy to Rs 4107cr tracking an almost similar 80.1% drop in sales volume to 76,599 units. The company posted EBITDA loss of Rs 863cr as compared to a profit of Rs 1546cr in Q1FY20. ASP however increased by 7.6% qoq to Rs 4.8 lakh/unit. Increased sales likely to follow higher enquires The management has indicated that post Q1 enquiries are at 85-90% of pre-Covid levels. The share of first-time buyers has risen by ~5% (from 45% in Q4FY20). It expects a shift from public transport to personal transport which is likely to drive demand for entry level cars. MSIL launched a subscription based model on pilot basis in Bengaluru and Gurugram and the response has been quite encouraging. These factors are likely to work in favour of Maruti owing to a strong small car portfolio, thereby further increasing its market share. Volumes in the month of Aug-2020 were up by 17.1% YoY to 124,624 units. Production to ramp up as restrictions ease off MSIL is currently producing ~4000 units/day across its Haryana and Gujarat (single shift) plants. As the Gujarat plant starts with the second shift in mid-Aug20, Maruti will produce an incremental 900 units per day. Production increased by 11% in the month of Aug-2020.

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Long term Triggers Dominant position in the domestic PV segment MSIL is the 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. 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. It has now discontinued some diesel models as the gap has shrunk. Also relatively higher cost of acquisition compared to petrol and similar running cost has reduced economic vialbility of diesel cars particularly in small and mid-segment. Cars of the company are well received by the market due to value for money image, lower maintenance costs and wide service network alongwith 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.

(Source: Company, HDFC sec)

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Some of the expected launches are Jimny, Wagon R electric, 6/7-seater WagonR (to compete with Renault Triber, which has received a good response), Futuro-e, Vitara, 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. Suzuki’s global alliance with Toyota is likely to benefit the company Toyota Motor Corporation and Suzuki Motor Corporation (SMC) 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. The companies would engage in joint product development and collaboration in production, in addition to promoting the mutual supply of products, by bringing together Toyota’s strength in electrification technologies and Suzuki’s strength in technologies for small vehicles. The Toyota and Suzuki partnership has already seen the launch of the Toyota Glanza, which is essentially a rebadged Maruti Suzuki Baleno. The alliance will also see Maruti Suzuki supplying the Vitara Brezza, 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. Both companies are also exploring ways to expand their partnership in India beyond vehicle development to include joint sourcing of components as part of a strategy to cut costs, especially for their full hybrid offerings. Low penetration to aid long term growth Vehicle penetration in India stands at around 25-28 four-wheelers per 1000 people as per various estimates. Historically, vehicle sales in some of the key global markets have shown an inflexion point at a similar level of penetration. In countries such as South Korea, Japan and China, CAGR of car sales were in excess of 20% over the next 5 years once this level of penetration was achieved. This was supported by strong growth in GDP per capita. Barring the slowdown in last couple of years, India has been witnessing strong GDP growth driven by factors like increasing disposable incomes in the rural agriculture sector, presence of a large pool of skilled and semiskilled workers, and a strong educational system.

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This is likely to result in increased vehicle penetration and MSIL is likely to be a key beneficiary of an uptick in passenger vehicle sales. Wide portfolio of cars and a strong service network has created a business moat for the company especially in the Tier II and below cities. Global OEMs have limited products in the entry level segment which is the strong point for MSIL. With the lack of significant competition in the entry level segment MSIL stands to gain the most from the underpenetrated market of India. Premiumisation to enhance average sales price The Indian PV market has been gradually shifting from entry/hatchback cars to premium hatchbacks and utility vehicles. With the rising disposable incomes customers are now willing to pay for extra safety features and technologies such as Bluetooth, reverse parking cameras, navigation system, automatic transmission, etc. which make their driving experience more comfortable. The extra features are leading to an improvement in average sale price. However MSIL being a strong player in small car segment, its ASP is amongst the lowest in OEM in India. The company is also focusing on introducing cars through its premium dealership network NEXA launched in FY16. As of FY20 it had 375 NEXA outlets across the country.

(Source: Company, HDFC sec)

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Strong support from parent MSIL receives valuable technological support from its parent SMC in rolling out new models, introducing new features and upgrading to new regulations. The company introduced two new models in FY20 - XL6 and S-Presso – and facelifted 6 models. The company has transitioned its entire portfolio into BS-VI compliant models far ahead of the competition. MSIL also sources vehicles from SMC’s wholly owned subsidiary Suzuki Motor Gujarat (SMG) under a contract manufacturing arrangement wherein the vehicles are sold to MSIL at cost. SMG currently has capacity to manufacture 5 lakh units and is looking to expand to 7.5 lakh units in FY21. The contract manufacturing arrangement has freed MSIL from expanding its own capacity and it can concentrate on marketing efforts. This would enable the company to improve its margins, return ratios and generate higher free cash flows. Resilient financial profile MSIL has maintained its strong financial risk profile with a net worth in excess of Rs 50,000cr and liquidity of over Rs 40,000cr as of FY20. The company has a strong cash generating ability and negligible debt levels. With the contract manufacturing arrangement with SMG, its cash flows can fund the capital expenditure and working capital needs. Financial flexibility is further enhanced by largely unutilised bank lines of Rs 3000cr. Due to the strong liquidity, MSIL is able to provide financial support to its dealer and vendors to tide over the challenging business environment. Reduction in GST on small cars could boost demand Recently industry has demanded and the Govt is favourably considering a cut in GST rates on small cars from 28%. However looking at the current fiscal situation it seems unlikely to happen soon. However as and when this happens, it would result in lower cost of ownership and higher demand. What could go wrong

Car buying is a discretionary purchase and affordability and sentiments are likely to play key roles in the near term for car sales due to the Covid-19 pandemic.

Raw material prices constitute ~65-70% of the selling price. Although commodity prices are at low levels currently due to lack of demand, a spike in prices of key raw materials like steel and aluminium can hurt margins.

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Indian PV segment is expected to witness strong growth. 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.

We expect sales volume to decline by ~15% in FY21 and bounce back by ~13% in FY22. However a prolonged impact of Covid-19 could result in deeper slowdown or a slower pullback which might result in lower volumes.

MSIL is exposed to risks related to fluctuations in forex rates because of its large import, royalty payments, and exports. Direct and indirect raw material imports constituted around 15% of net sales. Besides, MSIL pays a part of its royalty in yen. Royalty on MSIL plus SMG models put together is ~5.4% of net sales.

If availability or cost of finance is impacted due to liquidity or other issues at NBFCs, then sales growth of all automobile companies (including MSIL) could get impacted.

Rapid adoption of EV in India could create challenge for MSIL in terms of demand for its ICE vehicles coming down and at the same time if it is not ready to participate in the EV market with reasonable priced cars, then its overall revenues and margins could get impacted.

Continued rise in petrol prices (despite crude oil price softening globally) could hurt demand for cars by first time users.

EBITDA margins for MSIL are on the downtrend over the last three years. This has to be reversed soon to avoid invetors from giving lower valuations.

Despite presence in the segment for many years, its share in UVs has been poor. Also post phasing out of diesel vehicles, it needs to replace sales of diesel vehicles by other vehicles. Also Its premium dealership channel Nexa is overly dependent on Baleno sales.

About the company Maruti Suzuki India Limited (MSIL), a subsidiary of Suzuki Motor Corporation (SMC), Japan, is India’s largest passenger car maker. It is credited with having ushered in the automobile revolution in the country. MSIL is engaged in the business of manufacturing and sale of passenger vehicles in India. Making a small beginning with the iconic Maruti 800 car, MSIL today has a vast portfolio of 16 car models with over 150 variants. The product range extends from entry level small cars like Alto 800, Alto K10 to the luxury sedan Ciaz. Other activities include facilitation of pre-owned car sales, fleet management, car financing.

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MSIL has two state-of-the-art manufacturing facilities located in Gurugram and Manesar in Haryana, capable of producing ~1.5mn units per annum. Suzuki Motor Gujarat Pvt. Ltd. (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 0.5mn units has been made available, thereby taking the combined production capability to ~2mn units. The products of the company are sold in 90 countries through 2390 outlets. It has a support network of 3864 service stations. Formerly known as Maruti Udyog Ltd., MSIL was incorporated as a joint venture between the Government of India and SMC in February, 1981. It became a subsidiary of SMC in 2002 which currently owns equity of 56.2%.

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Financials Income Statement

Balance Sheet (Rs cr) FY18 FY19 FY20 FY21E FY22E

As at March (Rs cr) FY18 FY19 FY20 FY21E FY22E

Net Revenues 79,763 86,020 75,611 63,079 74,418

SOURCES OF FUNDS

Growth (%) 17.2 7.8 -12.1 -16.6 18.0

Share Capital - Equity 151 151 151 151 151

Raw Material expenses 54,876 60,132 53,035 45,038 51,869

Reserves 41,606 45,991 49,946 54,353 62,252

Gross Profit 2,834 3,255 3,384 2,902 2,932

Total Shareholders Funds 41,757 46,142 50,097 54,504 62,403

Other Operating Expenses 9,992 11,634 11,889 9,966 10,642

Total Debt 111 150 199 249 299

EBITDA 12,062 10,999 7,303 5,172 8,975

Net Deferred Taxes 559 564 592 622 653

EBITDA Margin (%) 15.1 12.8 9.7 8.2 12.1

TOTAL SOURCES OF FUNDS 42,427 46,855 50,889 55,375 63,355

Growth (%) 16.5 -8.8 -33.6 -29.2 73.5

APPLICATION OF FUNDS

Depreciation 2,758 3,019 3,526 3,263 3,340

Net Block 13,359 15,408 15,382 14,619 14,779

EBIT 9,304 7,980 3,777 1,909 5,635

CWIP 2,126 1,600 1,680 1,764 1,852

Other Income 2,046 2,561 3,421 3,820 4,405

Investments 1,208 1,034 1,034 1,034 1,034

Interest expenses 346 76 133 100 58

Total Non-current Assets 16,693 18,042 18,096 17,417 17,665

PBT 11,003 10,466 7,065 5,629 9,982

Cash & Equivalents 34,153 35,660 40,178 44,192 52,754

Tax 3,282 2,965 1,414 1,222 2,083 Inventories 3,161 3,326 3,314 3,174 3,366

RPAT 7,722 7,501 5,651 4,407 7,899

Debtors 1,462 2,310 2,279 2,292 2,463

Adj PAT 7,722 7,501 5,651 4,407 7,899

Other Current Assets 3,901 3,594 3,858 4,148 4,466

Growth (%) 5.1 -2.9 -24.7 -22.0 79.2 Total Current Assets 42,677 44,890 49,629 53,805 63,050

EPS 255.7 248.4 187.1 145.9 261.5 Creditors 13,917 12,703 13,321 12,178 13,529

Other Current Liabilities & Provns 3,026 3,373 3,516 3,668 3,832

Total Current Liabilities 16,943 16,077 16,837 15,847 17,360

Net Current Assets 25,734 28,813 32,792 37,958 45,689

TOTAL APPLICATION OF FUNDS 42,427 46,855 50,889 55,375 63,355

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Cash Flow Statement

Key Ratios

(Rs cr) FY18 FY19 FY20 FY21E FY22E

FY18 FY19 FY20 FY21E FY22E

Reported PBT 11,003 10,466 7,065 5,629 9,982 Profitability (%)

Non-operating & EO items -2,046 -2,561 -3,421 -3,501 -4,004

EBITDA (%) 15.1 12.8 9.7 8.2 12.1

Interest Expenses 346 76 133 98 58

EBIT (%) 11.7 9.3 5.0 3.0 7.6

Depreciation 2,758 3,019 3,526 3,263 3,340

APAT (%) 9.7 8.7 7.5 7.0 10.6

Working Capital Change 2,760 -1,573 539 -1,153 831

RoE (%) 19.8 17.1 11.7 8.4 13.5

Tax Paid -3,189 -2,960 -1,386 -1,171 -1,989

RoCE (%) 20.0 16.9 11.8 8.4 13.4

OPERATING CASH FLOW ( a ) 11,633 6,467 6,456 3,166 8,218

Solvency Ratio

Capex -3,698 -4,542 -3,580 -2,584 -3,588

Debt/EBITDA (x) -2.8 -3.2 -5.5 -8.5 -5.8

Free Cash Flow 7,935 1,925 2,876 563 4,290

Net D/E (x) -0.8 -0.8 -0.8 -0.8 -0.8

Investments -347 174 0 0 0

PER SHARE DATA

Non-operating income 2,046 2,561 3,421 3,501 4,004

EPS (Rs) 255.7 248.4 187.1 145.9 261.5

INVESTING CASH FLOW ( b ) -1,999 -1,807 -159 917 416

CEPS (Rs) 347.0 348.3 303.9 253.9 372.0

Debt Issuance / (Repaid) -373 39 50 50 50

BV (Rs) 1383 1528 1659 1804 2066

Interest Expenses -346 -76 -133 -98 -58

Dividend (Rs) 80.0 80.0 56.1 43.8 75.7

FCFE 7,217 1,888 2,793 514 4,281

Turnover Ratios (days)

Share Capital Issuance 21 -700 0 0 0

Inventory days 9 12 14 14 14

Dividend -2,417 -2,417 -1,695 -1,323 -2,286

Debtor days 17 31 20 30 29

FINANCING CASH FLOW ( c ) -3,114 -3,153 -1,778 -1,371 -2,295

Creditors days 38 36 38 39 37

NET CASH FLOW (a+b+c) 6,520 1,507 4,518 2,712 6,339

VALUATION

P/E (x) 25.4 26.2 34.7 44.6 24.9

P/BV (x) 4.7 4.3 3.9 3.6 3.1

EV/EBITDA (x) 13.5 14.6 21.4 29.5 16.0

EV / Revenues (x) 2.0 1.9 2.1 2.4 1.9

Dividend Yield (%) 1.2 1.2 0.9 0.7 1.2 (Source: Company, HDFC sec Research)

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Price Chart

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