Company Name – Maruti Suzuki India Ltd (Maruti Suzuki) Current Share Price – INR 8,420 (July 12, 2022) Market Cap – INR 2,54,342 cr |
1. What is interesting about the stock?
Some advertisements (like the one above) leave an everlasting impression due to the pertinence of the message. Remember the little Sikh boy saying “Papa ki karaan, petrol khatam hi nahin haunda”, or the liquor baron looked like buying a yacht whose main consideration was “Kitna deti hai?”, or the young boy in Ladakh nodding in affirmative when asked about a nearby Maruti service station in the middle of barren Ladhaki terrain? Maruti Suzuki has been India’s leading passenger vehicles brand because it understands the psyche of the cost-conscious (purchase price, maintenance cost, and resale value) Indian car buyer to perfection and can cater to him/her in every nook and corner of the country. These factors have helped the Company retain its pole position with 5 of the top 10 models sold in a month usually belonging to Maruti Suzuki.
Maruti Suzuki India is a subsidiary of Suzuki Motor Corporation (SMC), Japan. The Company has two manufacturing facilities located in Gurugram and Manesar in Haryana, with a production capacity of 1.5 Mn units per annum. Suzuki Motor Gujarat Pvt. Ltd. (SMG), a subsidiary of SMC, was set up in Hansalpur, Gujarat in 2017 and has an additional annual production capacity of 0.75 Mn units resulting in a total capacity of 2.25 Mn units. Maruti sells 14 car models through ~1,050 car dealers in 33 states and 280 cities and has over 4,000 service stations.
In a country where Ford, GM, and Fiat eventually threw the towel, consistently maintaining almost 50% share is truly remarkable. Between FY15 and FY20, the Company’s share in the domestic passenger vehicles segment grew from 45% to 51% in terms of units sold. However, things are now beginning to become uncomfortable. Maruti’s market share had dropped to 48.5% in FY21 due to a lack of product launches. What’s even more worrisome is that in FY22, Maruti’s market share had fallen drastically to ~43%. Meanwhile, Tata Motors' market share has grown to 12% in the same period from ~8% in FY21. In FY22, Maruti Suzuki’s sales have grown by ~13% while it has grown by ~49% for Tata Motors’ passenger vehicles business. Company has close to 300,000 pending bookings which are increasing due to semiconductor shortage. Given the importance, Tata Motors has been laying on well-designed and well-packaged products, it seems logical to conclude that Maruti is losing ground on product desirability. Another reason for the loss of ground in FY22 has been the reduced sales due to the semiconductor shortage.
Maruti has been late to the SUV and EV party with course corrections resulting in plans to launch 6 new SUVs in the next 3 years. As far as EVs are concerned, the Company is in no hurry with the expected launch in FY25. Factors cited by the chairman of Maruti Suzuki to avoid the EV market in the short term are:
Weather conditions: The weather conditions are electric vehicles are not ideal due to the hot weather. Maruti Suzuki wants the EVs to be perfectly safe before venturing aggressively into the segment
Higher cost of EV vehicles: Due to the higher cost of EV batteries, the market for EVs is expected to be lesser as compared to the advanced economies
Only 10% market share by 2030: According to Hisashi Takeuchi, CEO of Maruti Suzuki, the market share of EV vehicles will be too less as compared to developed economies.
Manufacturing of batteries in India: Batteries will have to be manufactured in India rather than imported, in order to reach realistic numbers in EV manufacturing.
The silver lining has been improving exports. In FY22, ~240,000 units have been exported by Maruti Suzuki. Africa is a large market for Maruti with South Africa being a key contributor due to Jimny’s popularity and expanding distribution network on the back of the tie-up with Toyota.
2. Key Historical Financials
FY20 and FY21 were troublesome years for the Company with revenue declining by 10% CAGR over the 2 years and PAT declining by 24% CAGR. Revenue has recovered in FY22 with a growth of 26% on a YoY basis
The NBFC crisis led to an increase in borrowing costs and enhanced application rejection rate (from 3-4% to 15-20%), BS-VI emission norms impacting the price of entry-level cars by as much as 20% and COVID-19 have all contributed to the declining sales
Semi-conductor shortage and higher commodity prices coupled with high fixed costs of the operations, due to the take-or-pay capacity arrangement with the Suzuki Gujarat plant has led to consistently declining revenue and profitability margins.
3. What is my view on company valuation?
Maruti Suzuki is currently trading at an EV/EBITDA (TTM) ratio of c. 33x and P/E (TTM) ratio of c. 66x. Tata Motors on the other hand is trading at an EV/EBITDA (TTM) ratio of c. 9.4x. Given that Maruti has been losing market share, the current valuation seems to be expensive. However, like cricket commentators often say, form is temporary but class is permanent. If Maruti can get its strategy on customer preferences right (SUV, EV), launch new and attractive products and restructure its current fixed cost arrangement with the Suzuki Gujarat plant, it could justify these valuations.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Product launches that are dated and not in line with competitor offerings
Late introduction of electric vehicles (expected in FY25)
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.
Comments