MSIL Analyst Report

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Maruti to be a key beneficiary of industry growth.Maruti will have a disappointing FY12,

in our view, with sales set to fall near 6% and EBITDA margin down 150bps. Admittedly,

headwinds are likely to persist near-term as well, as margins remain under pressure and the

sales growth revival is gradual. However, we see margins bottoming and competition peaking

in FY12, with both set to normalise in FY13/14. As a result, Marutis earnings are expected to

grow at a CAGR of c27% in FY12-14. Aside from robust industry growth and an improving

EBITDA margin, we see the company benefiting from a stronger go-to-market with the labour

disputes behind it and a slew of new models in the pipeline.

Competition is likely to moderate in FY13from the peak seen in FY12. Along with thelaunch of new models and variants in 2012, Maruti should regain some of its lost market

share. While it may have lost some of its customer base permanently, we expect it will

retain many customers due to its strong service network and competitively priced spare-

part and maintenance services.

We believe the industry is set for years of strong structural growth.We believe Indias

car industry has years of strong growth ahead of it. Our confidence stems from empirical

data from other markets, which suggests that after penetration passes 20 cars per thousand

people, industry growth tends to accelerate. India, we believe, is close to this inflection point

and is unlikely to see a repeat of the prolonged slowdown in car sales in 2011.

We initiate on Maruti with OW and a target price of INR1,200, based on a 15% discountto our DCF-based valuation. We are not factoring a significant improvement in margins.

Increases in commodity prices and Japanese yen appreciation are the key downside risks.

Key concerns and our take on FY13 for Maruti

High competitionfrom global OEMs

Besides likely moderation in competition, Maruti's new launches should improve its competitivestrength. Also Marutis lower maintenance cost and spare parts should be able to positively influenceword of mouth in 2012 and beyond for new cars

Yen appreciation Yen appreciation has impacted profitability in the past. We have not assumed any change in currency.For detailed analysis on yen sensitivity and MSIL exposure, please refer to page 28.

Dieselisation We believe as labour issues settle for MSIL and diesel variants pick up (along with the possibleintroduction of Wagon R diesel), Maruti should be able to leverage the India dieselisation phenomenon.

Slower 4W demand Car demand in India should remain strong in the long term as per our analysis.

Source: HSBC

Overweight

Targetprice (INR) 1,200.00Share price (INR) 953.60Forecast dividend yield (%) 0.8

Potential return (%) 26.6

Note: Potential return equals the percentagedifference between the current share price andthe target price, plus the forecast dividend yield

Mar 2011 a 2012 e 2013 eHSBC EPS 79.19 62.39 86.67HSBC PE 12.0 15.3 11.0

Performance 1M 3M 12M

Absolute (%) -12.9 -17.7 -33.8Relative^ (%) -6.9 -13.5 -17.0

Note: (V) = volatile (please see disclosure appendix)

28 November 2011

Yogesh Aggarwal*

Analyst

HSBC Securities and Capital Market

(India) Private Limited

+9122 2268 1246

[email protected]

Vivek Gedda*

Associate

Bangalore

View HSBC Global Research at:http://www.research.hsbc.com

*Employed by a non-US affiliate ofHSBC Securities (USA) Inc, and is notregistered/qualified pursuant to FINRAregulations

ssuer of report: HSBC Securities andCapital Markets(India) Private Limited

Disclaimer &Disclosures

This report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it

Industrials

Autos

Equity India

Company report

Enterprise value (INRm) 203822Free float (%) 100Market cap (USDm) 5,270Market cap (INRm) 275,505

Source: HSBC

Maruti Suzuki India (MSIL)

Initiate OW: The dawn approaches

We expect strong structural growth in Indias car industry;Maruti is likely to be a key beneficiary

FY12 should see competition peak and margins bottom;both are set to normalise in FY13/14

Initiate on Maruti with OW and TP of INR1,200; EPS to growat 27% CAGR in FY12-14e

Index^ BOMBAY SE IDXIndex level 15,700RIC MRTI.BOBloomberg MSIL IN

Source: HSBC
http://www.research.hsbc.com/http://www.research.hsbc.com/http://www.research.hsbc.com/http://www.research.hsbc.com/


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Financials & valuationFinancial statements

Year to 03/2011a 03/2012e 03/2013e 03/2014e

Profit & loss summary (INRm)

Revenue 370,400 365,714 432,291 498,408EBITDA 36,644 30,790 43,177 50,520Depreciation & amortisation -10,135 -11,703 -14,698 -17,195Operating profit/EBIT 26,509 19,087 28,479 33,325Net interest 1,839 2,354 2,216 2,743PBT 30,437 24,505 33,759 39,132HSBC PBT 31,088 24,505 33,759 39,132Taxation -8,202 -6,475 -8,711 -10,108Net profit 22,235 18,030 25,049 29,025HSBC net profit 22,886 18,030 25,049 29,025

Cash flow summary (INRm)

Cash flow from operations 36,405 31,617 42,491 48,650Capex -25,592 -30,288 -33,839 -29,261Cash flow from investment -4,893 -30,288 -33,839 -29,261Dividends -2,528 -2,705 -3,381 -3,381Change in net debt -29,224 1,376 -5,271 -16,008FCF equity 1,271 -11,361 776 11,465

Balance sheet summary (INRm)

Intangible fixed assets 0 0 0 0Tangible fixed assets 69,580 88,165 107,306 119,372Current assets 63,563 61,654 70,795 90,814Cash & others 25,085 23,709 28,979 44,988

Total assets 184,210 200,886 229,168 261,253Operating liabilities 37,184 38,348 44,287 50,728Gross debt 3,093 3,093 3,093 3,093Net debt -21,992 -20,616 -25,886 -41,895Shareholders funds 138,675 154,000 175,667 201,311Invested capital 70,874 87,762 104,835 114,470

Ratio, growth and per share analysis

Year to 03/2011a 03/2012e 03/2013e 03/2014e

Y-o-y % change

Revenue 25.0 -1.3 18.2 15.3EBITDA -7.3 -16.0 40.2 17.0Operating profit -15.3 -28.0 49.2 17.0

PBT -15.3 -19.5 37.8 15.9HSBC EPS -8.4 -21.2 38.9 15.9

Ratios (%)

Revenue/IC (x) 5.7 4.6 4.5 4.5ROIC 29.6 17.7 21.9 22.5ROE 17.8 12.3 15.2 15.4ROA 12.9 9.4 11.7 11.9EBITDA margin 9.9 8.4 10.0 10.1Operating profit margin 7.2 5.2 6.6 6.7EBITDA/net interest (x)Net debt/equity -15.9 -13.4 -14.7 -20.8Net debt/EBITDA (x) -0.6 -0.7 -0.6 -0.8CF from operations/net debt

Per share data (INR)

EPS reported (fully diluted) 76.94 62.39 86.67 100.43HSBC EPS (fully diluted) 79.19 62.39 86.67 100.43DPS 7.50 8.00 10.00 10.00Book value 479.84 532.87 607.85 696.58

Valuation data

Year to 03/2011a 03/2012e 03/2013e 03/2014e

EV/sales 0.5 0.6 0.5 0.4EV/EBITDA 5.5 6.6 4.6 3.6EV/IC 2.9 2.3 1.9 1.6PE* 12.0 15.3 11.0 9.5P/Book value 2.0 1.8 1.6 1.4FCF yield (%) 0.6 -5.1 0.3 5.1Dividend yield (%) 0.8 0.8 1.0 1.0

Note: * = B ased on HSBC EPS (fully diluted)

Price relative

366

566

766

966

1166

1366

1566

1766

2009 2010 2011 2012

366

566

766

966

1166

1366

1566

1766

Maruti Suzuki India Ltd Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC

Note: price at close of 23 Nov 2011


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Maruti will have a disappointing FY12 in our

view, with sales set to fall 6% and EBITDA

margin down 150bps. Headwinds are likely topersist near term as well, as margins remain under

pressure and the sales growth revival is gradual.

However, we see margins bottoming and

competition peaking, with both set to normalise in

FY13/14. As a result, Marutis earnings are

expected to grow at a CAGR of c27% in FY12-14.

Aside from robust industry growth and an

improving EBITDA margin, we see the company

benefiting from stronger go-to-market with the

labour disputes behind it and a slew of new modelsin the pipeline.

Years of strong growth ahead

We believe the car industry in India has years of

strong growth ahead. Our confidence stems from

the empirical data we have found in other markets,

both developed and developing. Interestingly,

these markets suggest that after penetration passes

20 cars per 1,000 people, industry growth tends to

accelerate. With India close to this inflection point,

we think it is unlikely to see a prolonged

slowdown in car sales.

Competition should moderate in FY13

We believe it is unlikely that Maruti will see a rise

in competition from the highs of FY12. Whilecompetition might intensify in some segments,

like minis, competition is likely to moderate in

others, such as the compact and super-compact

segments, as the initial euphoria around new

models subsides. Additionally, with the labour

disputes hopefully behind the company, the

company is likely to see sales growth return for its

key products, like the Swift and Swift DZire.

Chart 1.1: Market share of top auto players in India

Hyundai18%

Honda4%

Others8%

Tata

11%

VW4%

Ford4% GM

5%

Maruti41%

Toyota

5%Hyundai

18%

Honda4%

Others8%

Tata

11%

VW4%

Ford4% GM

5%

Maruti41%

Toyota

5%Hyundai

18%

Honda4%

Others8%

Tata

11%

VW4%

Ford4% GM

5%

Maruti41%

Toyota

5%

Source: SIAM, Crisil, HSBC

Investment summary

We see years of strong growth ahead for Indias car industry; in our

view, competition should peak and margins should bottom in FY12,

with both likely to normalise looking ahead, benefiting Maruti

Near-term headwinds remain, but Marutis distribution reach,

product pipeline and inexpensive valuations support its prospects

Initiate on Maruti with OW and TP of INR1,200; EPS expected to

grow at 27% CAGR in FY12-14


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Along with the moderation of overall competition,

the launch of new models in 2012 should help

Maruti regain some lost market share. Maruti

recently launched the Swift at a marginally lower

price than the previous model. Furthermore, to

fortify its market share in the mini segment,

Maruti is also expected to launch another sub-Alto

model called Cervio in early 2012. In the super-

compact segment, the company is likely to launcha cheaper version of DZire. There are also two

new SUVs expected to be launched in 2012, as it

seeks to build a wider product portfolio.

Overall, while it is unlikely to regain its entire

past market share, Maruti should be able to grow

in line with the market in the medium-to-long

term even in a competitive market. With a

positive bias to market growth and relatively less

intense competition, we are positive on Marutis

growth in FY13 and beyond.

Initiate on Maruti with OW rating and DCF-based

TP of INR1,200

While PE is the most followed valuation method, we

believe long-term trends can only be captured by

DCF analysis. Stocks may trade at a premium or

discount to DCF based valuation depending on what

stage of the cycle that the industry is, but the long-

term sustainable growth, based on the penetration

levels of the country and cost of ownership trends,can only be captured by DCF analysis.

Our DCF assumptions are shown in Table 1.2. We

use a WACC of 11% based on a risk-free return of

3.5% and cost of equity of 11% as per HSBC

methodology.

Our DCF analysis values Maruti at INR1,405. We

apply a discount of about 15% to this DCF valuation

to reflect the near-term concerns about growth and

margins, given near-term earnings remain depressed

due to the appreciation of the Japanese yen and

Table1.1: Maruti - key concerns and our view

Key concerns Our view for FY13

High competition from globalOEMs

Competition is likely to moderate going forward, as Maruti's new launches improve its competitive strength inFY13Maruti's lower maintenance cost and spare parts should also influence word of mouth in favour of Maruti in 2012and beyond for new cars

YEN appreciation Yen appreciation has impacted profitability in the past. We have not assumed any change in currency. Pleasefind the detailed analysis on yen sensitivity and Marutis exposure in the report

Dieselisation Maruti has also been impacted by a steep price increase in petrol vs. diesel, which created higher demand fordiesel cars. We believe as labour issues settle for Maruti and diesel variants pick up (along with the possibleintroduction of Wagon R diesel), Maruti should be able to leverage the India dieselisation trend.

Slower car demand in India Car demand in India should remain good in the long term. Our analysis of developed and developing countriessuggests that industry growth accelerates once penetration exceeds 20 cars per 1,000 people. India is close tothis level.

Source: Company data, HSBC estimates

Table1.2: DCF assumptions

FY12e FY13e CAGR FY13-18e CAGR FY18-25e

Total domestic PV market sales growth (Cars + UVs+ Vans) 5.6% 13.4% 13.1% 7.0%Total domestic Car sales growth 3.7% 13.4% 13.6% 7.3%Total domestic UV + Vans market growth 12.5% 13.7% 11.4% 5.8%

Market share of Maruti in Domestic Cars 43.7% 44.5%Total Sales (Domestic + Exports) Growth rates of Maruti -6.0% 14.2% 10.8% 6.2%EBITDA margins 8.4% 9.9%

Terminal growth assumed 4%Total PV 405,796Value per share 1,405

Source: HSBC estimates


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slower ramp-up in production in light of recent

labour issues. This gives us a target price of

INR1,200, which implies a potential return of

26.6%, inclusive of a dividend yield of 0.8%.

Under our research model, for stocks without a

volatility indicator, the Neutral band is 5ppts above

and below the hurdle rate for Indian stocks of 11%.

As our target price implies a potential return that is

above the Neutral band, we initiate coverage on the

stock with an Overweight rating. Potential returnequals the percentage difference between the current

share price and the target price, including the

forecast dividend yield when indicated.

At our target price, the stock trades at an implied PE

of 14x on our FY13 EPS estimate. This is on par

with the 10-year average PE multiple of 14x 12M

forward earnings. The stock is currently trading at

11x our FY13e EPS forecast.

Table 1.3: Past cycle and corresponding valuations

FY05-10 FY10-12

CAGR Revenue 13.2% 11.1%CAGR earnings 7.4% -15.0%Max PE 22.8x 17.4xMin PE 7.9x 11.2xAverage PE 14.3x 13.5x

FY12-14

CAGR Revenue 16.7%CAGR earnings 26.9%Current PE on FY12e EPS 15.3xCurrent PE on FY13e EPS 11.0xCurrent EV/EBITDA on FY13eEBITDA

4.7x

Source: Company data, HSBC estimate, DataStream. Repriced on 23 Nov 2011

HSBC estimates vs. consensusOur earnings estimates are broadly in line with

consensus for FY13, with a couple of key

differences: we are more positive on the long-term

prospects for the sector and Marutis ability to

gain market share. Consequently, our DCF

valuation and therefore target price are slightly

higher than consensus.

Table 1.4: Historic valuation range and DCF summary for Maruti

DCF Target Price

Value per share 1,405 1,200Implied PE on FY13e EPS 16.2x 13.8x5-year historic average PE*2-year historic average PE*5-year max PE5-year Min PECurrently trading on FY13e EPS

13.7x14.0x20.2x4.9x

11.0x

Source: Company data, HSBC estimate, DataStream. Repriced on 23 Nov 2011

Table1.5: HSBC vs. consensus estimates

(in INR m) ____ HSBC estimates _____ __ Consensus estimates __ _______Variance________ FY11 FY12e FY13e FY12e FY13e FY12e FY13e

Revenue 370,400 365,714 432,291 365,727 439,935 0.0% -1.7%

EBITDA 36,644 30,790 42,920 30,022 40,020 2.6% 7.2%EBITDA Margin 9.9% 8.4% 9.9% 8.2% 9.1% 21bps 83bpsNet Profit 22,235 18,030 24,859 19,698 25,570 -8.5% -2.8%EPS (INR) 76.9 62.4 86.0 65.5 86.7 -4.7% -0.8%

Source: HSBC estimates, Datastream, Bloomberg


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Passenger car industry outlook

The passenger car industry in India has attracted a

growing number of multinational companies in the

past few years. With a low car penetration rate and

a populous, high growth economy, we believe

India represents a promising opportunity for

passenger vehicle OEMS. Compared with Indias

15 cars per 1,000 people, the penetration rate in

other major Asian countries, like Japan and Korea,

is 20 to 30 times as high.

We believe the car industry in India has many

years of strong growth ahead. Our confidence

stems from empirical data gathered from other

markets, both developed and developing. Most of

these markets show that once penetration exceeds

a level of around 20 cars per 1,000 people,

industry growth tends to accelerate. With India

close to this inflection point, we believe a

prolonged slowdown in car sales is unlikely.

We break down our analysis into three stages:

1) identifying historical evidence/trends from Japan

and Korea; 2) analyzing whether emerging countries

like China, Indonesia followed these trends; and

3) looking at what this analysis means for India?

Industry analysis

Empirical data from both developed and developing markets

suggest Indias car industry has years of strong growth ahead

While competitive intensity seems high in the near term, we expect

a moderation in FY13

Incumbents, such as Maruti, with a strong product pipeline should

be able to maintain market share

Chart 2.1: India is well behind other countries in terms of carpenetration

Chart 2.2: Car sales in Japan and Korea accelerated duringtheir high economic growth phase when penetrationexceeded a certain level

55%

46% 46% 44%

23% 23%

14%

2% 1%

0%

10%

20%

30%

40%

50%

60%

Germany

USA

UK

Japan

Korea

Malaysia

Brazil

China

India

55%

46% 46% 44%

23% 23%

14%

2% 1%

0%

10%

20%

30%

40%

50%

60%

Germany

USA

UK

Japan

Korea

Malaysia

Brazil

China

India

-

100

200

300

400

500

19

61

19

65

19

69

19

73

19

77

19

81

19

85

19

89

19

93

19

97

20

01

20

05

20

09

Japan Korea

-

100

200

300

400

500

19

61

19

65

19

69

19

73

19

77

19

81

19

85

19

89

19

93

19

97

20

01

20

05

20

09

Japan Korea

Source: World Bank, Industr y Sources, HSBC estimates Source: World Bank, HSBC


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Stage 1) Historical evidence from Japan and

Korea

Japan saw strong growth in car sales from 1965 to

1973 (see Chart 2.3), averaging around 22%

annually. Consequently the penetration level

surged from 15 cars per 1,000 people in 1965 to

135 cars in 1973. This strong car sales growth was

accompanied by strong GDP growth of near 9.5%during the same period.

Similarly in Korea, with a lag of around 20 years,

car penetration levels reached around 15 cars per

1,000 people in 1986 before accelerating through

the next 10 years to 165. During this period, GDP

in Korea grew at a 7.3% CAGR.

Stage 2) Are emerging markets, like China and

Indonesia, following the same trend?

China is lagging Korea by around 20 years in

terms of car penetration. Its penetration level hit

20 cars per 1,000 people in 2007-08 and has since

shown strong growth. Similarly, in Indonesia,

once the penetration level hit 20 cars in 2003-04,

industry growth accelerated (see Chart 2.4).Outside of Asia, Mexicos car penetration

increased from 20 cars per 1,000 people to 70

during 1968-1980.

Stage 3) What does this mean for India?

We believe India is at the cusp of strong industry

growth. Penetration in India has reached 15 cars

per 1,000 people and we expect it to increase to

65 by 2025, translating into CAGR of 9.8% in

Chart 2.5: Following empirical cues, we believe India is likely to see strong industry growth in the coming years.

-

10

20

30

40

50

60

1983

1984

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1986

1987

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2011

2012

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2015

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2023

China India Indonesia India-upside risk

Cars per 1,000

people

-

10

20

30

40

50

60

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

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2010

2011

2012

2013

2014

2015

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2022

2023


Cars per 1,000

people

-

10

20

30

40

50

60

1983

1984

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1989

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1991

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2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023


Cars per 1,000

people

Source: CEIC, Datastream, HSBC estimates.

Chart 2.3: Car penetration per 1,000 people: China lagsKorea by 20 years and India lags China by 6 years

Chart 2.4: Car penetration per 1,000 people: China vs. Indiavs. Indonesia India yet to take off

-

100

200

300

400

500

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

Indonesia JapanKorea China

-

100

200

300

400

500

1961

1965

1969

1973

1977

1981

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2005

2009


-

100

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500

1961

1965

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1997

2001

2005

2009


-

10

20

30

40

50

1990

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2010

China India Indonesia

-

10

20

30

40

50

1990

1992

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2006

2008

2010


-

10

20

30

40

50

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010


Source: KAMA,CAMA, CEIC, HSBC estimates Source: World Bank, HSBC


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sales during FY12-25. Based on the empirical

evidence we have drawn from other countries, we

believe the risks to our forecasts are to the upside

(see Chart 2.5).

Macro-trends favourable as well

Per-capita GDP is the key metric we have used to

capture the growth in potential for people to buy

passenger vehicles. GDP per capita (constant

2000 USD) in India came to USD837 in 2010,

around the level seen in China in 1998.

As discussed earlier, China began to show a

material improvement in its car penetration level

in 2007-08, as Korea did in the late 1980s

(lagging by 20 years) and Japan did in the late

1970s (lagging by 40 years).

However, comparing absolute GDP per capita,

China lags Korea by 40 years, although the car

penetration level lags by 20 years (half the

amount of time). Meanwhile, India lags China by

12 years in terms of per-capita GDP but just 6

years in terms of car penetration, with 14 cars per

1,000 people in 2010.

On the basis of these observations, and the fact

that passenger car sales growth in the past ten

years (c12% CAGR) in India has been twice that

of Indias GDP growth (CAGR c6%), we believe

car penetration will continue to grow faster than

GDP per capita.

What could drive this growth?Favourable demographics and rising income

levels have essentially created a large number of

potential first-time car buyers. Consequently, the

Indian passenger car industry is currently

dominated by mini and compact cars, which

together command about 80% of total passenger

car sales. As income levels rise, the industry is

also seeing a shift from entry level cars to

premium hatchbacks.

Indeed, corporate wages (see Chart 2.7) are on the

rise. Wages in the IT and IT-enabled services

industries employing around 3m people directly

and 10m people indirectly are expected to grow

strongly by 18-20% in FY12. We expect around

15% growth in FY13 as well, with a positive bias.

We believe while wages may not go up to the

same extent seen in the past few years, buying

capacity is likely to continue rising. Indias

competitive strength as a low cost destination withan abundant supply of talent is likely to continue

in coming years, making the country one of the

most attractive offshore destination.

We think the lack of an efficient public transport

system is another key growth driver for car sales.

There are compelling reasons for owners of two-

wheel vehicles to graduate to cars, including the

ability to safely travel in larger groups. Especially,

Chart 2.6: Growth in rural income Chart 2.7: Growth in corporate wages

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

20

01-02

20

02-03

20

03-04

20

04-05

20

05-06

20

06-07

20

07-08

20

08-09

20

09-10

Low skill salaries Increase in farm income

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

20

01-02

20

02-03

20

03-04

20

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-5.0%

0.0%

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15.0%

20.0%

20

01-02

20

02-03

20

03-04

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20

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09-10


115

132

143

153

171

193

15%

9%

7%

12%

13%

14%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

2005

2006

2007

2008

2009

2010

2011

100

120

140

160

180

200

Corporate Salary increase y-o-y growth

2x

115

132

143

153

171

193

15%

9%

7%

12%

13%

14%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

2005

2006

2007

2008

2009

2010

2011

100

120

140

160

180

200


2x

115

132

143

153

171

193

15%

9%

7%

12%

13%

14%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

2005

2006

2007

2008

2009

2010

2011

100

120

140

160

180

200


2x

Source: Business Standard, Labour Bureau of Shimla, HSBC Source: Economic Times, Business Standard, Hewitt Salary increase surveys, HSBC.

Corporate salaries rebased to 100 for 2005


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as the lack of proper public infrastructure (for

instance, metros, monorails and public buses)

adds to the risk of congestion in the various

modes of public transport and growing frustration

among commuters.

Trends in cost of ownership

Increasing interest rates and fuel prices have

sharply impacted the car industry in the past few

months. Petrol prices have increased by around

50% in the last two years and by around 30% in

the last one year. Interest rates have risen by

300bps in the past 13 months. Unsurprisingly, the

cost of ownership for a small car buyer has

increased by 25% in the past two years.

Chart 2.8: Cost of ownership of an Alto per annum

90,000

110,000

130,000

150,000

170,000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Cost of ownership of an Alto (INR per annum)

90,000

110,000

130,000

150,000

170,000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12


90,000

110,000

130,000

150,000

170,000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12


Source: HSBC

Will the shift to diesel cars last?

An increasing number of Indian car buyers are

preferring diesel cars over petrol ones. As of 16thNovember, the cost of diesel (INR41 per litre)

was about 38% lower than that of petrol (INR66.4

per litre) in New Delhi. Besides, diesel engines

have higher mileage per litre than petrol engines,

which adds up to a differential of about INR2 for

every kilometre (assuming on average a diesel car

runs 3km more per litre than a petrol version).

Consequently, diesel car sales have seen strong

growth in the past few quarters. A slew of new

diesel cars have been launched by global OEMcar makers, like VW Polo, VW Vento and Toyota

Etios. We note bookings of the diesel variant of

the Maruti Swift are around 88% of the total Swift

bookings as of 1 November 2011.

Considering the high subsidy burden on diesel

prices, it is likely that the government will devise

ways to cut down diesel subsidies on passenger

vehicles either by selectively removing the

diesel fuel subsidy on passenger vehicles or

equivalently charge a one-time tax on passenger

cars with diesel engines.

As of 4 November 2011, if subsidies are removed,

diesel prices would increase by INR8.5, thus

reducing the cost benefit from diesel to near

INR1.5 per kilometre.

Table 2.1: Savings per annum for diesel vs. petrol vehicle

Kms per month

price differentialdiesel petrol(INR/lt)

500 1000 1500 1800

25 11,828 23,655 35,483 42,57923 11,196 22,392 33,588 40,305

20 10,249 20,497 30,746 36,89516.5 9,143 18,287 27,430 32,916


With diesel cars around INR80,000-120,000 more

expensive than petrol variants, it would take a

long time for diesel car owner to recoup the price

difference from fuel savings unless car usage is

extremely high.

Table 2.2: Years to recover the cost differential of the vehicle

Kms per month

price differentialdiesel petrol(INR/lt)

500 1000 1500 1800

25 8.5 4.2 2.8 2.323 8.9 4.5 3.0 2.520 9.8 4.9 3.3 2.716.5 10.9 5.5 3.6 3.0

Source: HSBC estimates.


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In Tables 2.1 to 2.2, we have assumed that diesel

cars offer 3km more per litre compared to petrol

cars and the price differential between the two

variants to be INR100,000. The number of years

to recover the payment does not include the added

cost of capital for the period of recovery.

As discussed, diesel engines are costlier to

maintain, which narrows the cost of ownership as

illustrated in Table 2.3. The table compares two

factors: 1) the change in monthly ownership cost

in the last two years for both petrol and diesel

variants of Maruti DZire; and 2) the difference in

cost of ownership of diesel versus petrol in the

respective periods.

Table 2.3: Analysis of Maruti DZire petrol and diesel versions

_______________Jun-09 _______________ ______________ Aug-11_______________ Petrol car Diesel car Petrol car Diesel car

Price of the car* 503,400 592,000 547,228 636,630Amount financed 80% 80% 80% 80%Interest rates 8.5% 8.5% 11.5% 11.5%Loan tenure (years) 3 3 3 3EMI 12,713 14,950 14,436 16,795Fuel prices per litre 41 31 70 41Average distance per month 1000 1000 1000 1000Mileage (KMPL) 12 15 12 15Fuel expense (per month) 3,417 2,067 5,833 2,733Average maintenance cost per Annum 8,000 10,000 10,000 12,500Total cost of ownership per month 16,796 17,850 21,103 20,570Change in monthly Ownership Costs 25.6% 15.2%Diesel Savings vs. Petrol -6.3% 2.5%



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Competitive threatsIn the past few years, the growth potential of the

Indian car market has attracted many global OEM

car makers, who have launched models across a

broad range of product segments. In the early

large part of this decade, among all the global

OEMs, only Hyundai was focused on the compact

(hatchback) segment, while most of the others

(like Honda, Toyota and VW) were targeting the

sedan or premium car market. However, in recent

years, most OEMs have realised the importance of

the compact car segment and launched many

products to capture first-time buyers.

Among smaller cars, the compact segment has

seen the most launches in the past few quarters. A

total of 8 new compact models (excluding the

Maruti Ritz) have been introduced over the last

ten quarters, which have cumulatively gained a

market share of c34% in the compact segment.

Overall, the compact segment grew 54% during

the same period. Including sales of the Ritz, 42%

of the growth in the segment over last ten quarters

has come from new launches.

The mini segment, on the other hand, has seen

only one launch (the Maruti A-Star) in the same

period. Chart 2.9 illustrates that although the

combined market share of smaller class cars i.e.

mini (A1 class), compact (A2 class) and super

compact (A3 class) cars has not changed

significantly at around 80% of total car sales,

individually the compact segment has been taking

market share away from the mini segment.

New launches have expanded the market for

compact cars; each time there has been a new

launch, the segment has grown at a much faster

rate than the rest of the passenger car market.Note that while the combined sales of small cars

(mini, compact and super-compact) grew 27.5%,

the compact segment excluding new launches

grew only 12% in the same period, indicating

there has been significant market share erosion of

existing models by new models.

Make way for the new

The two major players in the passenger car market

in India are Maruti and Hyundai, with market

shares of 43% and 19%, respectively, in FY11.

Unsurprisingly, the emergence of other OEMs has

impacted these two incumbents the most.

The new market entrants have been aggressive in

launching new products to gain a foothold in the

market. As shown in the Chart 2.10, Maruti,

Hyundai and Honda combined lost more than a

Chart 2.9: New model introductions have expanded growth for compact segment

44.8%32.2%

35.2%

43.4%

7.2% 8.4%

5.1%

25.0%

44.1%

7.3%

-9.5%-5.9%

15.0%

38.9%44.5%

54.6%

69.4%65.2%

36.6%

15.2%24.3%

29.1%33.6%33.5%

28.1%

0%

20%

40%

60%

80%

100%

4Q09 1Q12 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

-20%

0%

20%

40%

60%

80%

A1: Market share A2: Market share A3: Super Compact A2: Compact (y-o-y) Total PC (y-o-y)

Ritz,

Punto,

Jazz

Figo, Polo Micra Liva

44.8%32.2%

35.2%

43.4%

7.2% 8.4%

5.1%

25.0%

44.1%

7.3%

-9.5%-5.9%

15.0%

38.9%44.5%

54.6%

69.4%65.2%

36.6%

15.2%24.3%

29.1%33.6%33.5%

28.1%

0%

20%

40%

60%

80%

100%

4Q09 1Q12 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

-20%

0%

20%

40%

60%

80%


Ritz,

Punto,

Jazz


44.8%32.2%

35.2%

43.4%

7.2% 8.4%

5.1%

25.0%

44.1%

7.3%

-9.5%-5.9%

15.0%

38.9%44.5%

54.6%

69.4%65.2%

36.6%

15.2%24.3%

29.1%33.6%33.5%

28.1%

0%

20%

40%

60%

80%

100%

4Q09 1Q12 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

-20%

0%

20%

40%

60%

80%


Ritz,

Punto,

Jazz


Source: SIAM, HSBC


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14% market share in the period from 1Q09 to

2Q12. Renault, Nissan and Peugeot as well have

recently announced their plans to launch a long

India-specific product pipeline.

Marutis survival strategy

We believe competition is likely to moderate from

FY12 onwards. While in some product segments

(like minis) competition might increase, in others

(such as compacts) competition is likely to

moderate as the initial euphoria around newlaunches subsides. Additionally, with labour

issues hopefully behind it, the company is likely

to see sales growth coming back for its key

products like DZire and Swift.

Aside from an expected moderation in overall

competition in the coming few quarters, we

believe the launch of new models in 2012 should

help Maruti regain some lost market share. Maruti

recently launched its new Swift, which is priced

slightly lower than the previous model.

Furthermore, to fortify its market share in the mini

segment, Maruti is also expected to launch

another sub-Alto model called Cervo in early

2012. In the super-compact segment, the company

is likely to launch a cheaper version of DZire.

Further, there are two new SUVs expected to be

launched in 2012 to build a wider product

portfolio. Maruti doesnt have much of a presence

in the SUV market, which currently accounts for

about 13% of the total passenger car market.

Overall, while Maruti is unlikely to regain its

entire past market share, we believe it should be

able to grow in line with the market in the

medium-to-long term even in a competitive

market. With a positive view of future market

growth (as discussed in the previous section) and

less intense competition, we are positive on

Marutis growth prospects for FY13 and beyond.

Chart 2.10: Market share changes since 1Q09

22

206 181

(1)

(383)

(39)

(161)(48)

437

99

(1,005)

432

(1,050)

(750)

(450)

(150)

150

450

Fiat

Ford

GM

Hon

da

Hyundai

M&M

Tata

Motors

Skoda

Toyota

Volk

swagen

Niss

an

MarutiSuzuki

22

206 181

(1)

(383)

(39)

(161)(48)

437

99

(1,005)

432

(1,050)

(750)

(450)

(150)

150

450

Fiat

Ford

GM

Hon

da

Hyundai

M&M

Tata

Motors

Skoda

Toyota

Volk

swagen

Niss

an

MarutiSuzuki

22

206 181

(1)

(383)

(39)

(161)(48)

437

99

(1,005)

432

(1,050)

(750)

(450)

(150)

150

450

Fiat

Ford

GM

Hon

da

Hyundai

M&M

Tata

Motors

Skoda

Toyota

Volk

swagen

Niss

an

MarutiSuzuki

Source: Crisil, Overdrive, HSBC


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Table 2.4: Comparison of spare parts and servicing costs ofrecent models significantly higher than Maruti Alto

INR Clutch plate Brake pad Servicingcost

Maruti Suzuki Alto 4,500 1,000 800Hyundai Santro 5,000 1,600 1,000Swift Petrol 6,500 2,000 1,500Ford Figo Petrol 6,000 1,200 1,500Ford Figo Diesel 7,000 1,200 2,750Etios Liva 5,000 2,330 3,250Etios Liva Diesel 6,500 2,330 4,250Etios 5,000 2,330 3,250Volkswagen Polo n/a n/a n/a

Source: HSBC.

Chart 2.13: Maruti exports and market share estimates

42%42%

43%

38% 38% 38%

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

FY09

FY10

FY11

FY12e

FY13e

FY14e

35%

37%

39%

41%

43%

45%

Exports Market share of Maruti i n Exports

42%42%

43%

38% 38% 38%

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

FY09

FY10

FY11

FY12e

FY13e

FY14e

35%

37%

39%

41%

43%

45%

Exports Market share of Maruti i n Exports

Source: SIAM, Crisil HSBC

Chart 2.11: Maruti product launches an increasing number of launches and refreshes (with another 18 models planned for next 5 years)

2008 2009 2010 2011 2012e

A-Star Ritz,

Eeco ,

K-series engine,

Minor

modifications in

SX4, Estilo

New Swift,

K izashi Sports

Sedan,

SX4 Diesel

variant,

New Wagon R

launched,

Alto K10,

Green range

SX4,Estilo, Eeco ,

Alto

New Dz ire ,

New small car ( Cervo )

Wagon R Diesel,

Maruti Ertriga SUV

and a new version of

Gypsy

2008 2009 2010 2011 2012e

A-Star Ritz,

Eeco ,

K-series engine,

Minor

modifications in

SX4, Estilo

New Swift,

K izashi Sports

Sedan,

SX4 Diesel

variant,

New Wagon R

launched,

Alto K10,

Green range

SX4,Estilo, Eeco ,

Alto

New Dz ire ,

New small car ( )

Wagon R Diesel,

Maruti Ertriga SUV


Gypsy

2008 2009 2010 2011 2012e

A-Star Ritz,

Eeco ,

K-series engine,

Minor

modifications in

SX4, Estilo

New Swift,

K izashi Sports

Sedan,

SX4 Diesel

variant,

New Wagon R

launched,

Alto K10,

Green range

SX4,Estilo, Eeco ,

Alto

New Dz ire ,

New small car ( Cervo )

Wagon R Diesel,

Maruti Ertriga SUV


Gypsy

2008 2009 2010 2011 2012e

A-Star Ritz,

Eeco ,

K-series engine,

Minor

modifications in

SX4, Estilo

New Swift,

K izashi Sports

Sedan,

SX4 Diesel

variant,

New Wagon R

launched,

Alto K10,

Green range

SX4,Estilo, Eeco ,

Alto

New Dz ire ,

New small car ( )

Wagon R Diesel,

Maruti Ertriga SUV


Gypsy

Source: Overdrive, Auto car, Company press releases, News articles in renowned newspapers, BS Motoring , HSBC

Chart 2.14: New Launches by other OEMs2008 2009 2010 2011 2012e

Hyundai: i - 20

Fiat : Linea

VW: Jetta

Fiat : Punto

Honda: Jazz

Chevrolet: Beat,

Cruze

Ford: Figo

VW: Polo

Totyota : Etios ,

Et ios Liva Dies el

Hyundai: Eon

Honda: Brio, new

Jazz

Nissan: Sunny

Renalt : F luence

Ford: New Fiesta

Hyundai: New

Verna

Renault: Pulse

Nissan: Micra

Toyota: Etios

VW: Vento

Ford: New Fiesta

Hyundai: i30

Skoda: Rapid, Citigo

VW: Up

Renault: Small car

Fiat: Bravo

2008 2009 2010 2011 2012e

Hyundai: i - 20

Fiat : Linea

VW: Jetta

Fiat : Punto

Honda: Jazz

Chevrolet: Beat,

Cruze

Ford: Figo

VW: Polo

Totyota : Etios ,

Et ios Liva Dies el

Hyundai: Eon

Honda: Brio, new

Jazz

Nissan: Sunny

Renalt : F luence

Ford: New Fiesta

Hyundai: New

Verna

Renault: Pulse

Nissan: Micra

Toyota: Etios

VW: Vento

Ford: New Fiesta

Hyundai: i30


VW: Up

Renault: Small car

Fiat: Bravo

2008 2009 2010 2011 2012e

Hyundai: i - 20

Fiat : Linea

VW: Jetta

Fiat : Punto

Honda: Jazz

Chevrolet: Beat,

Cruze

Ford: Figo

VW: Polo

Totyota : Etios ,

Et ios Liva Dies el

Hyundai: Eon

Honda: Brio, new

Jazz

Nissan: Sunny

Renalt : F luence

Ford: New Fiesta

Hyundai: New

Verna

Renault: Pulse

Nissan: Micra

Toyota: Etios

VW: Vento

Ford: New Fiesta

Hyundai: i30


VW: Up

Renault: Small car

Fiat: Bravo

2008 2009 2010 2011 2012e

Hyundai: i - 20

Fiat : Linea

VW: Jetta

Fiat : Punto

Honda: Jazz

Chevrolet: Beat,

Cruze

Ford: Figo

VW: Polo

Totyota : Etios ,

Et ios Liva Dies el

Hyundai: Eon

Honda: Brio, new

Jazz

Nissan: Sunny

Renalt : F luence

Ford: New Fiesta

Hyundai: New

Verna

Renault: Pulse

Nissan: Micra

Toyota: Etios

VW: Vento

Ford: New Fiesta

Hyundai: i30


VW: Up

Renault: Small car

Fiat: Bravo

Source: Overdrive, Auto car, Company press releases, News articles in renowned newspapers, BS Motoring , HSBC


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Table 2.5: Maruti sales growth and market share forecasts by segment

FY11 FY12e FY13e CAGR FY12-14e

A1 : Mini segment (M800, A-Star, Alto, Wagon R)Maruti 28.7% -3.6% 11.5% 10.4%Market 20.4% 1.2% 13.1% 12.6%Market Share 83.0% 79.1% 77.9%A2 : Compact segment (Swift, Estilo, Ritz)Maruti 18.5% -16.3% 23.5% 18.6%Market 35.5% 1.0% 14.0% 13.5%Market Share 30.0% 24.9% 26.9%A3: Super Compact segment (DZire)Maruti 29.1% -5.8% 19.9% 17.4%Market 39.0% 20.9% 10.0% 10.5%Market Share 76.1% 59.3% 64.6%A4: Mid-Size segment (SX4)Maruti 48.4% 1.9% 11.7% 11.9%Market 15.4% 24.3% 12.0% 12.0%Market Share 17.1% 14.0% 14.0%Total passenger cars*Maruti 26.2% -7.1% 15.4% 13.3%Market 29.7% 3.5% 12.9% 12.6%Market Share 48.8% 43.8% 44.7%Utility Vehicles (Grand Vitara, Gypsy)Maruti 43.9% 7.4% 20.0% 15.9%Market 21.2% 6.4% 11.7% 11.7%Market Share 1.7% 1.7% 1.9%Vans (Omni, Versa, Eeco)Maruti 58.5% 4.7% 11.9% 11.9%Market 41.4% 17.1% 16.5% 13.6%Market Share 75.6% 67.6% 64.9%Total domestic sales

Maruti 30.1% -5.4% 14.9% 13.1%Market 29.2% 5.1% 13.1% 12.6%Market Share 44.9% 40.4% 41.1%ExportsMaruti -6.3% -10.0% 8.8% 9.4%Market 0.0% 1.5% 6.0% 6.0%Market Share 31.0% 27.5% 28.2%Total SalesMaruti 24.8% -5.9% 14.2% 12.7%Market 23.3% 5.0% 12.1% 11.7%Market Share 43.0% 38.5% 39.3%

Source: Company data, HSBC estimates, *Includes Kizashi an executive segment car.


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Maruti will have a disappointing FY12 in our view,

with sales set to fall 6% and EBITDA margin down

150bps. Headwinds are likely to persist near term as

well, as margins remain under pressure and the sales

growth revival is gradual. However, we see margins

bottoming and competition peaking, with both set tonormalise in FY13/14.

As a result, Marutis earnings are expected to grow

at a CAGR of c27% in FY12-14. Aside from

robust industry growth and an improving EBITDA

margin, we see the company benefiting from

stronger go-to-market with the labour disputes

behind it and a slew of new models in the pipeline.

We believe competition is likely to moderate after

the highs of FY12. While in some segments, (like

minis) competition might increase, in others (such

as compacts and super compacts) competition is

likely to moderate as the initial euphoria around

new launches subsides. Along with the launch ofnew models in 2012, the company should regain

some lost market share. Maruti recently launched

its new Swift at a slightly lower price than the

previous model.

The dawn approaches

Strong market growth, normalising competition and robust product

pipeline point to a pick-up in sales in FY13e

Along with margins likely bottoming in FY12, we see EPS growing

at a strong CAGR of 27% for FY12-14

We initiate with an OW rating and a target price of INR1,200

Chart 3.1: Revenue growth trend Chart 3.2: EBITDA margin and EPS growth rate

19%

-4%

5%1%

27%

20%

10%

22%

14%

42%

25%

-5%

5%

15%

25%

35%

45%

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

50

100

150

200

250

300

350

400

Net Sales y-o-y growth (LHS)

19%

-4%

5%1%

27%

20%

10%

22%

14%

42%

25%

-5%

5%

15%

25%

35%

45%

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

50

100

150

200

250

300

350

400

Net Sales y-o-y growth (LHS)

270%

57%32%

-30%

105%

-11%

-50%

0%

50%

100%

150%

200%

250%

300%

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

0%

4%

8%

12%

16%

EBITDA Margin y -o-y grow th (LHS)

Source: Company data, HSBC estimates Source: Company data , HSBC estimates


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Sales analysisMini (A1 class), compact (A2 class) and super-

compact (A3 class) cars are the three largest

segments of the overall passenger car market

(accounting for around 84% in 2Q12). Maruti has

the dominant market share in all three segments. In

the past few quarters, competition has increased

significantly in compact and super compact cars, as

global OEMs have aggressively targeted the two

segments with new models. Consequently, Maruti

has lost market share in most of segments. We

discuss in this section if Maruti can regain some of

the lost ground or will continue to lose share.

Chart 3.3: Maruti sales volume growth estimates by segment

FY12e FY13e CAGR FY12-14e

A1 -3.6% 11.5% 10.4%A2 -16.3% 23.5% 18.6%A3 -5.8% 19.9% 17.4%A4 1.9% 11.7% 11.9%Total passenger cars -7.1% 15.4% 13.3%Utility Vehicles 7.4% 20.0% 15.9%

Vans 4.7% 11.9% 11.9%Total domestic sales -5.4% 14.9% 13.1%Exports -10.0% 8.8% 9.4%Total Sales -5.9% 14.2% 12.7%


Mini segment

The mini segment includes small hatchbacks, such

as the M800, A-Star, Alto and Wagon R. Maruti has

the dominant position in this segment, with around

an 80% share, and has only a few competitors

primarily Santro from Hyundai and Spark from GM.

We believe mini cars are particularly attractive to

first-time buyers in tier-two and tier-three towns and,

therefore, are highly influenced by Marutis broad-

based distribution and servicing strength.

Chart 3.4: A1 segment trends

80%78%

85%

83%

81%

86%

89%

79%

20%

25%

30%

35%

40%

45%

50%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

75%

80%

85%

90%

% share of A1 in the total marketMarket share of Maruti in A1 (RHS)

Source: Company data, HSBC

While we do not envisage any meaningful threat to

Marutis dominance in this segment in the near term,

we believe two key risks are worth highlighting:

The segment is shrinking,as car owners are

upgrading to bigger and more expensive cars.

The compact and super-compact segments are

increasing as a proportion of the overall market.

Competition in this segment is increasing.

Hyundai launched its 800cc Eon recently and its

distribution capabilities are as strong as

Marutis. The new Eon poses a particularly

significant threat to the market share of Maruti

Chart 3.5: Passenger car market Chart 3.6: Maruti passenger car profile

38% 36% 33%

43% 46% 44%

0%

20%

40%

60%

80%

100%

FY10 FY11 2Q12

A1: Mini A2: CompactA3: Super Compac t A4: Mid-Size

A5: Ex ecutive A6: Premium

58% 59% 62%

29% 27% 25%

0%

20%

40%

60%

80%

100%

FY10 FY11 2Q12

A1: Mini A2: CompactA3: Super Com pac t A4: Mid-Size

A5: Ex ecutive A6: Premium

Source: Company data, SIAM, HSBC Source: Company data, SIAM, HSBC


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Alto. Assuming Eon takes a 6% market share in

FY13 and market growth in the mini segment is

14%, Marutis overall growth in the segment

should be limited to 11%.

Eon vs. Alto

Based on the reviews and specifications, the Eon

outclasses the Alto. The Eon has an 815cc, 3-

cylinder engine similar to the Altos 796c, 3-

cylinders) engine, but with significantly more power

(56PS compared to that of 47PS). The fuel economy

for the Eon is claimed to be 21.1km per litre, which

is better than the Altos 19.7km per litre.

Pricing is very competitive as well with the base Eon

model (without AC and power windows) costing

INR269,000 ex-showroom in Delhi compared to

INR250,000 for the base Alto model. Including air-

conditioning, power windows and power steering,

the Alto LXi and Hyundai Eon Era are priced the

same. Recently launched models (like the A-Star)

have not been able to sustain their pricing after the

initial hype, partly owing to their high price tags

versus existing models in the segment. The Eon, on

the other hand, adopts some parts from Hyundais

Santro and i10 models in order to keep costs

contained and offer better value for money.

In Chart 3.7, we compare cars in the mini segment

and ranked them based on major specifications.Subsequently, we compare Eon and Alto, based on a

web chart which suggests the Eon is more

competitive on many fronts.

Chart 3.7: Hyundai Eon

0

12345678

Price*

EngineCapacity

Power

Torque

Mileage

Wheelbase

Width

Top Speed

Pick up

Maintenance

Eon Alto

0

12345678

Price*

EngineCapacity

Power

Torque

Mileage

Wheelbase

Width

Top Speed

Pick up

Maintenance

Eon Alto

Source: Overdrive, BS Motoring, Autocar, major news paper articles, HSBC

Eon will also benefit from the extensive dealer

network and service centres established by Hyundai,in our view. Hyundai planned to increase its network

of sales outlets in rural areas to 1,000 by the end of

September 2011 from the around 700 they had in

July. Maruti currently has a sales network of 933

outlets and 2,946 service centres as of 31 March

2011. Maruti enjoys significant goodwill in the mini

segment and its cars are perceived as low

maintenance compared to Hyundai.

Table 3.1: Eon vs. other models

Eon vs. Models Risk of MarketShare Erosion

Pricecomparison

Specs comparison Customer segment Comments

M800 Low Lower Perceived as an outdated model Less overlap: Rural and loyalcustomers

Low priced. Customer segment notentirely comparable.

Alto High Comparable Comparable. Lower power output High overlap If priced competitively, Eon poses majorthreat to Alto

Wagon-R High Higher Power/weight ratio modestly higher but fuelefficiency lower.

High overlap

A-Star Medium Higher Larger engine. Medium OverlapSpark Medium Higher Power/weight ratio modestly higher but fuel

efficiency lower.Medium Overlap Low market share due to factors like

style, free maintenance contractsSantro High Higher Same platform/parts. Larger engine Medium Overlap New models perceived as improvements

on previous products

Source: Company data, HSBC.


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Table 3.2: Maruti Suzuki market share by segment in the past few quarters

4Q10 1Q11 2Q11 3Q11 4Q1

A1:Mini - M800, A-Star, Alto, Wagon R 80.8% 83.0% 85.9% 86.8% 88.6%A2:Compact Swift, Estilo, Ritz 32.5% 31.9% 30.7% 32.5% 26.6%A3: Super Compact - DZire 87.5% 85.8% 83.4% 87.2% 71.9%A4: Mid - Size - SX4 14.2% 13.8% 15.4% 11.3% 23.5%A5: Executive - Kizashi 0.0% 0.0% 0.0% 0.0% 0.9%Total passenger cars 46.4% 47.6% 48.2% 51.8% 47.5%Vans 70.1% 75.3% 75.1% 77.0% 74.9%

Y-o-y

Total passenger cars domestic 16.0% 23.0% 32.9% 36.8% 27.3%Exports 67.1% 37.9% -3.7% -20.3% -26.4%Total vehicles 21.5% 25.0% 27.4% 28.2% 19.5%

CommentsGuided for flat exports in

FY11A2 market share increased

due to the launch of AltoK10

Higher realisation domestics offset by lower

exporExpansion in South Africa,LATAM, Australia to offset

Europe weakness

Exports fell sharply due tslowdown in Europ

Footfalls and conversiorate on a declining mod



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Chart 3.8: A1 - Maruti likely to see market-share erosion inthe mini segment due to introduction of new small cars.

77% 78%

83%

79%

77%76%

200,000

300,000

400,000

500,000

600,000

700,000

FY09

FY10

FY11

FY12e

FY13e

FY14e

72%

74%

76%

78%

80%

82%

84%

A1:Mini - M800, A-Star, Alto, Wagon R

Market share of Maruti in A1 (RHS)

Source: Company data, SIAM, HSBC

Compact segment

The compact segment is the largest segment in

passenger vehicle market with around a 45%

market share. Competitive intensity is highest in

this segment and not surprisingly Maruti has lost

the most market share in the past few quarters.

Side effects of a growing market is increasedcompetition

The compact segment has been the fastest

growing segment of the market as its proportion

to the total market has increased to 43.4% in

2Q12 from 35% in 4Q09, largely driven by

existing car owners upgrading from minis and

new aspiring first-time buyers.

Chart 3.9: A2 segment trends

32%

36%

28%

34%36%

31%32%

27%

29%

24%

30%

35%

40%

45%

50%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

20%

25%

30%

35%

40%

% share of A2 in the total market


Source: Company data, SIAM, HSBC

As can be seen in the chart below, the compact

segment has seen a deluge of competition with

new launches like the Ford Figo, Hyundai i20,

VW Polo and Nissan Micra taking material

market share in the past two years. Established

models like Marutis Estillo, Tatas Indica and

Hyundais i10 have consequently lost market

share to the new challengers.

A spate of new launches has been scheduled in the

coming quarters, which will add to the pressure on

established models. However, we believe the

competitive pressure will recede in FY13 versus

FY12 for a number of reasons. Firstly, initial

euphoria over new launches should subside in

FY13. There will be fewer launches by brands

Chart 3.10: Market Share changes (bps) of various models in the compact segment since 1QFY09

1093

- 667

- 1014

- 209

815

- 339

- 1132

936

- 177 - 121

133 76

476

- 4227

433

- 1322

788

(1,500)

(1,000)

(500)

-

500

1,000

1,500

Swift

Ritz

Estillo

Indica

Indigo

Figo

Getz

i10

i20

Beat

Aveo

Palio

Punto

Jazz

Polo

Fabia

Micra

Liva

Source: SIAM, Crisil, HSBC estimates


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other than Maruti in FY13 versus the previous

year and monthly sales of the new cars launched in

2011 are already moderating. Additionally, Maruti

itself is launching new products and hopefully will

not see a repeat of the production disruption caused

by labour disputes in the last few quarters.

It is noteworthy that car buyers in this segment are

highly cost conscious; the higher cost of servicing

is likely to impact the customer wins by FY13,

when the free servicing schedule is over.

Overall, we expect Marutis market share to recover

modestly in FY13 and remain stable thereafter.

Chart 3.11: Compact segment growth and market shareestimates

32%34%

30%

25%

27% 27%

80,000120,000

160,000

200,000

240,000

280,000

320,000

FY09

FY10

FY11

FY12e

FY13e

FY14e

20%

25%

30%

35%

A2:Compact Swift, Estilo, RitzMarket share of Maruti in A2 (RHS)

Source: Company data, SIAM, HSBC estimates

Super compact segmentThe super compact segment is a critical growing

segment for Maruti; while it accounts for just 10% of

the market, it is growing faster than the overall

market. Super compact cars usually include entry

level sedans and, therefore, represent the first

upgrade for compact car owners. Mid-size cars

attract buyers who want the cabin space and storage

of a sedan but are cautious about cost of ownership.

With better fuel economy, diesel car sales are,

therefore, particularly picking up in this segment.

Maruti has a very strong product for this market.

DZire comes in both petrol and diesel versions

and has been a phenomenal success for the

company. In the past few months, Toyota Etios

has taken significant market share, helped by

disruption in the production of Dzire due to the

labour strikes.

Chart 3.13: Market share shift since 1Q09

(252)

(1,124)

(849)

2,628

(406)

(1,500)

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

3,000

Dzire

Logan

Accent

Etios

Fusion



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Chart 3.12: Maruti share trends in the A3 segment

80%

87% 89%83%

87%

72%

55%54%

0%

2%

4%

6%

8%

10%

12%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

40%

50%

60%

70%

80%

90%

100%




Table 3.3: DZire Vs competing models in the segment

Dzire Etios Accent Logan

Price Range INR499,000-714,000

INR496,000-682,000

INR524,000-562,000

INR550,000-636,000

ModelVariants

6 7 3 13

Engine type Petrol/Diesel Petrol/Diesel Petrol Petrol/DieselEnginecapacity

1248cc 1496cc 1500cc 1460-1600cc

Power (HP) 75-85 90 94 65

Mileage 15.4 kmpl 14.5 kmpl 9.5 kmpl 16 kmplWheel base 2390mm 2550mm 2440mm 2630mmComments + Built on

the hugelysuccessful

Swiftplatform.

+The qualityof interiors is

superior.

+ Featureslike climate

control are apositive

Competitivefeatures and

pricing.

+ Spacious

+ Better pickup and

power toweight ratio.

- Cheaperlooking

interiors

- Lowmileage

+Fuelefficient and

spaciouscar.

- Design andinteriors

reviews arenegative.

Source: HSBC, Overdrive

We believe Maruti will come back strongly in the

super compact market and DZire will remain one

of the primary earnings growth drivers for the

company for the following reasons:

Production of around 12,000 units or about

25% of the DZires total annual output was

disrupted in FY12. We expect that to reverse

adn the pent-up demand will be met in FY13.

The new DZire, scheduled for late 2011 or

early 2012, has been designed under 4 metres

long to qualify for lower excise duty. This

will reduce the price of the car and make it

more competitive.

Inherent demand for diesel engines is likely to

remain strong as the running cost of petrol

cars has been on the rise. Maruti plans to

increase its diesel capacity and also enter into

procurement deals with Fiat for diesel engines.

Overall, we estimate DZire sales will grow 23%

in FY13, compared to market growth of 11%,

leading to a market share gain of around 450bps

for FY13.

Chart 3.14: New Dzire to boost sales in this segment forMaruti

69%

82%

76%

59%

64%66%

-

30,000

60,000

90,000

120,000

150,000

FY09

FY10

FY11

FY12e

FY13e

FY14e

50%

60%

70%

80%

90%

A3: Super Compact - D'zireMarket share of Maruti in A3 (RHS)



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Mid-size segmentThe mid-size (A4 class) segment sales account for

about 6% of the total market. The segment is

highly volatile, both in terms of competition,

market share shifts and growth. The volatility in

this segment is illustrated by the VW Vento,

which was launched only four quarters ago and is

already the market leader with around a 25%

market share.

Chart 3.15: Maruti share trends in the A4 segment

18%

14%

10%11%11%11%

16%14%14%

15%

11%

23%

17%

9%

0%

2%

4%

6%

8%

10%

12%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

5%

10%

15%

20%

25%




Marutis SX4 lost market share in the past two

quarters, largely due to the production disruptions

caused by the strikes and the launch of competing

products by OEMs, such as Hyundai Verna and

VW Vento.

We believe as production is streamlined at the

Maruti plants, sales of SX4 will get back on track.

We expect SX4 to growth at a healthy rate in

FY13, in line with the overall market.

Chart 3.16: Mid-size segment growth and market shareestimates

13% 13%

17%

14% 14% 14%

8,000

12,000

16,000

20,000

24,000

28,000

32,000

FY09

FY10

FY11

FY12e

FY13e

FY14e

10%

12%

14%

16%

18%

A4: Mid - Size - SX4Market share of Maruti in A4 (RHS)


C segment

C segment has been the most resilient business

segment for Maruti. We have included both utilityvehicles and vans in the C segment for illustration

purposes. Maruti does not have much presence in

the utility vehicle market, but has a dominant

position in van and has strong product portfolio,

including Omni and Eeco. Both these vans are

extensively used in both tier-two cities for

personal purposes and cities for commercial

Chart 3.17: Change in market share since 1Q09

(261)

(782)

(217) (239)(496)

(84)

2,467

1

(195)

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

3,000

Ikon

Fiesta

Ave

o

Ver

na

City

SX4

Ven

to

370

Z

Lan

cer/Cedia

Source: Crisil, HSBC estimates


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purposes. Increasingly, Eeco has been used as city

taxis in tier-two cities. These vans have larger

space and can be used as shared cabs in smaller

towns. The expected launch of new SUVs in

4Q12 should help Maruti to gain some market

share in SUVs, which have largely been missing

from its portfolio.

Chart 3.18: Maruti remains the market leader

73%

67%

76%

68%

65%66%

0

40,000

80,000

120,000

160,000

200,000

240,000

FY09

FY10

FY11

FY12e

FY13e

FY14e

60%

65%

70%

75%

80%

C: Omni, Versa. EecoMarket share of Maruti in Vans (RHS)


Table 3.4: Maruti growth estimates and market share by segment

FY11 FY12e FY13e CAGR FY12-14e

A1Maruti 28.7% -3.6% 11.5% 10.4%Market 20.4% 1.2% 13.1% 12.6%Market Share 83.0% 79.1% 77.9%

A2Maruti 18.5% -16.3% 23.5% 18.6%Market 35.5% 1.0% 14.0% 13.5%Market Share 30.0% 24.9% 26.9%A3Maruti 29.1% -5.8% 19.9% 17.4%Market 39.0% 20.9% 10.0% 10.5%Market Share 76.1% 59.3% 64.6%A4Maruti 48.4% 1.9% 11.7% 11.9%Market 15.4% 24.3% 12.0% 12.0%Market Share 17.1% 14.0% 14.0%Total passenger carsMaruti 26.2% -7.1% 15.4% 13.3%Market 29.7% 3.5% 12.9% 12.6%Market Share 48.8% 43.8% 44.7%

Utility VehiclesMaruti 43.9% 7.4% 20.0% 15.9%Market 21.2% 6.4% 11.7% 11.7%Market Share 1.7% 1.7% 1.9%VansMaruti 58.5% 4.7% 11.9% 11.9%Market 41.4% 17.1% 16.5% 13.6%Market Share 75.6% 67.6% 64.9%Total domestic salesMaruti 30.1% -5.4% 14.9% 13.1%Market 29.2% 5.1% 13.1% 12.6%Market Share 44.9% 40.4% 41.1%ExportsMaruti -6.3% -10.0% 8.8% 9.4%Market 0.0% 1.5% 6.0% 6.0%Market Share 31.0% 27.5% 28.2%

Total SalesMaruti 24.8% -5.9% 14.2% 12.7%Market 23.3% 5.0% 12.1% 11.7%Market Share 43.0% 38.5% 39.3%

Source: Company data, HSBC estimates.


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Charts 3.19: Marutis recent sales profileA) Marutis market share and y-o-y growth in the Minisegment

B) Marutis market share and y-o-y growth in the Compactsegment

-40%

-20%

0%

20%

40%

60%

1

Q09

2

Q09

3

Q09

4

Q09

1

Q10

2

Q10

3

Q10

4

Q10

1

Q11

2

Q11

70%

75%

80%

85%

90%

Mark et s hare of Maru ti in A1 (RHS) y -o-y

-50%

0%

50%

100%

150%

1

Q09

2

Q09

3

Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2

Q11

20%

25%

30%

35%

40%



C) Marutis market share and y-o-y growth in the Mid-Sizesegment

D) Marutis market share and y-o-y growth in the SuperCompact segment

-50%

0%

50%

100%

150%

200%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

0%

5%

10%

15%

20%

25%


-40%

-20%

0%20%

40%

60%

80%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

40%

50%

60%

70%

80%

90%



E) Marutis market share and y-o-y growth in the total

domestic passenger cars segment

F) Marutis market share and y-o-y growth in the Vans and

SUV segment

-30%

-20%

-10%

0%

10%

20%

30%

40%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

40%

45%

50%

55%

Market share of Maruti in Total passanger carsy -o-y

-20%

0%

20%

40%

60%

80%

100%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

50%

55%

60%

65%

70%

75%

80%

Market share of Maruti in Vans y -o-y



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Profitability outlookMaruti has seen its EBITDA margin fall by about

900bps since 3QFY10 (see Chart 4.2). The

decline in profitability could be attributed to

multiple reasons: 1) Japanese yen depreciation as

the company has imports 22-25% of its costs in

yen (including royalty payments); 2) a decline in

export realisation due to euro fluctuations; 3) raw

material price increases; 4) an increase in royalty

rates to parent Suzuki; and last but not least 5) a

fall in production/sales of higher-margin products.

We discuss each of these margin drivers in detail.

Raw material costs

An increase in raw material prices has materially

impacted margins in the past few quarters. As seen

in Chart 4.2, the cost of most of the key raw

materials has gone up 10-60% since 3QFY10.

Assuming raw material costs remain constant at the

current levels, margins should remain stable or

improve sequentially. However, on a full-year basis,

FY12 margins would still fall 150bps versus FY11.

In FY13, however, assuming commodity prices

remain at the current levels, EBITDA margins

should increase 50bps, in our view.

Chart 4.1: Increase in prices of primary raw materials since3QFY10

27%

39%34%

9%

23%

52%58%

0%

10%

20%

30%

40%

50%

60%

70%

HR

Ste

el

CR

steel

Galvanised

Aluminium

Copper

CastIron

Rubber


Slower growth in higher-margin products

Labour issues at the Manesar plant and the

planned pull-out before the launch of the new

DZire impacted sales of one of the highest margin

Swift models, impacting profitability. The Swift

range (including the DZire sedan) accounts for

25% of the companys total unit sales, about 30%

of revenues and we estimate even more in terms

of profits. Additionally, around 80% of Swift unit

sales are now diesel models, which have a higher

selling price. We believe improving sales of Swift

in the coming months should contribute positively

to the companys margins.

Chart 4.2: Profitability trend

16.4% 16.1%15.0%

12.1% 12.1%10.7%

6.6%

9.2%

12.5% 13.0%

15.5%

13.5%

10.7%9.7% 10.2% 9.8%

6.6%

10.7%

0%

5%

10%

15%

20%

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

EBITDA margin

16.4% 16.1%15.0%

12.1% 12.1%10.7%

6.6%

9.2%

12.5% 13.0%

15.5%

13.5%

10.7%9.7% 10.2% 9.8%

6.6%

10.7%

0%

5%

10%

15%

20%

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

EBITDA margin



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Chart 4.3: Contribution of Swift + DZire to total sales

24%

30%

25%23%

26%25%

29%26%

24%

22%

28%

15%

20%

25%

30%

35%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

% of total domestic sales

24%

30%

25%23%

26%25%

29%26%

24%

22%

28%

15%

20%

25%

30%

35%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

% of total domestic sales


Export growth and realisation

The company was highly dependent on Europe for

exports. Europe used to contribute around 80% of

exports at the start of FY11. EUR/INR currency

fluctuations, therefore, significantly impact export

realisation. However, the companys exposure on

Europe has come down materially in the past few

quarters, partly due to the economic slowdown in

Europe and partly because the company has made a

concerted effort to grow outside of Europe.

Chart 4.4: EUR vs. INR

6666

64 6566

69 69

64

58

6061

63

65 66 66

50

55

60

65

70

75

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12e

6666

64 6566

69 69

64

58

6061

63

65 66 66

50

55

60

65

70

75

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12e

Source: Thomson One, HSBC estimates

Chart 4.5: Contribution of exports to the total sales

6%

9% 8%11%

13%

15%15% 15%14%

11%9% 9%

11%12%

0%

5%

10%

15%

20%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

Exports as % of total sales

6%

9% 8%11%

13%

15%15% 15%14%

11%9% 9%

11%12%

0%

5%

10%

15%

20%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

Exports as % of total sales


Table 4.1: EBITDA margins in the past few quarters

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

EBITDA margins 10.7% 10.7% 9.7% 10.2% 9.8% 6.6%EBITDA margins change -284 bps 09 bps -102 bps 52 bps -45 bps -323 bpsyen q-o-q 50.2 54.5 55.0 55.0 55.1 62.5

Comments Steep margin fall dueto 1) inc in royalty;

Price hikes in augustresulted in 40bps

decline in rawmaterial cost

Annual staff costpayout of INR522mcame in this quarter

Margins expansiondue to change in

accounting policy

ASPs improved near3% q/q due to higher

proportion of dieselcar sales in the

quarter

Commodity priceskept high

2) higher rawmaterial costs andlower exports revs

due to a weakeningEUR

Discounts down 18%y/y

ASPs fell 1.5% dueto EUR depreciation

and adverse mix

Cost cutting helpedmaintain EBITDA

margins

Royalty costsincreased due to

currencydepreciation

Royalty paymentsapproval increased

from 5% to 8%

Lower proportion ofA3 in 2Q resulted in

lower domesticrealisations

Despite increase inraw material costs

Utilization declinedowing to labour

issues

Realisation ofexports declined due

to EUR



28/48

28


Autos

28 November 2011

abc

Table 4.2: EUR tailwinds

FY12e FY13e FY14e

Exports in EUR 4.0% 4.0% 4.0%Exports in USD 6.0% 6.0% 6.0%Imports in USD 6.0% 6.0% 6.0%EUR/INR rate 65.6 66.0 66.0y-o-y 8.6% 0.5% 0.0%Net impact on the top line 0.3% 0.0% 0.0%Impact on EBITDA margins 34 bp 02 bp 00 bp


As seen in the table above, EUR weakness should

contribute about 30bps to margins in FY12.However, the full benefit may not flow through

as the company has hedged its EUR exposure for

FY12.

Yen exposure

The company has high yen exposure of about 22%

of sales. This includes direct exposure of near 7%

(including the royalty payments) and indirect

exposure of near 14-15%. The appreciation in the

yen impacted profitability in the past few quarters.

The company reported material marked-to-market

losses of INR760m in the recent 2Q12, including the

1Q royalty marked-to-market losses of INR500m

and the INR260m losses on commodity hedges.

While the yen appreciation should help reverse some

losses in 3Q, the 2Q payment to suppliers for

indirect imports is likely to nullify the benefit.

Chart 4.6: YEN to INR rate

4042

53 53

5152 52

50 50

54 55 55 55

60

64

40

45

50

55

60

65

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12e

Source: Company data, HSBC estimates, DataStream

In our view, every 1% change in the JPY/INR rate

impacts Marutis EBITDA margins by 20bps and

EBITDA by 2%. With margins declining, the

impact rises to 2-4% of EBITDA.

Table 4.3: Yen sensitivity analysis

Proportion of revenues (%)

Yen denominated costs 22.0Others in INR 66.0EBITDA margin 12.0

Appreciation in YEN 5.0%Yen denominated costs 23.1Others in INR 66.0EBITDA margin 10.9

Every 1% yen appreciation impacts EBITDA margin by 22 bpEvery 1% yen appreciation impacts EBITDA by -1.8%


The company is targeting to reduce its indirect yen

exposure by 2-3% every year by increasing the

localisation of components. While that is positive,

the steep appreciation in the yen in the recent months

poses a significant headwind for the company.

Assuming the

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