buy initiating coverage maruti suzuki ltd target price

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

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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


Exhibit 5: Trend in Net Average Selling Prices Exhibit 6: MSIL’s FY20 Portfolio Mix


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


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


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

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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


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 %)


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 %)


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


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


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


Exhibit 16: MSIL’s extensive Sales Network


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


Balance Sheet (Rs Cr)


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


13

Cash Flow (Rs Cr)


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


Ratio Analysis (%)


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


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).

1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the

Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a

subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries

engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are

available on www.axisbank.com.

2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association

of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity.

3. ASL has no material adverse disciplinary history as on the date of publication of this report.

4. I/We, Darshan Gangar, Chartered Accountant, author/s and the name/s subscribed to this report, hereby certify that all of the views expressed in this research

report accurately reflect my/our views about the subject issuer(s) or securities. I/We (Research Analyst) also certify that no part of my/our compensation was, is,

or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial

interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at

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company in the last 12-month period.Any holding in stock – No

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15

Disclaimer:

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Copyright in this document vests with Axis Securities Limited.

Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No. – 022-

40508080/ 022-61480808, Regd. off.- Axis House, 8th Floor, Wadia International Centre, PandurangBudhkar Marg, Worli, Mumbai – 400 025. Compliance Officer:

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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

buy initiating coverage maruti suzuki ltd target price

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