Maruti Suzuki India
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Equity Research INDIA April 16, 2018 BSE Sensex: 34193 Maruti Suzuki India SELL ICICI Securities Limited Downgrade from Hold is the author and There’s no such thing as a free lunch! Rs9,138 distributor of this report Reason for report: Company update and recommendation change Success in India’s ever growing passenger vehicle (PV) market remains elusive to Automobiles global giants like Toyota, VW, Ford (together at ~8% market share after decades of presence). The Korean giant Hyundai’s success (~17% market share) is still an exception in this market and its presence is set to be boosted with entry of Kia Target price Rs7,700 Motors in 2019. Signs are clear that global OEMs want a bigger pie of this market, we take a closer look at Toyota & Suzuki’s recent moves from a Japanese lens. Earnings revision Emerging three power centres amongst Japanese OEM’s– new alliances, (%) FY19E FY20E Sales ↓ 1.9 ↓ 4.3 different paths: 1) Nissan Motor Co: The 19-year old Renault-Nissan alliance has EBITDA ↓ 2.0 ↓ 4.4 led the way, achieving considerable success (scaled to the top globally), bolstered PAT ↓ 2.1 ↓ 4.8 by the recent addition of Mitsubishi into its fold; 2) Honda Motor Co: It has taken the path of joining forces with specialized partners to be future-ready (associations with Target price revision Waymo for autonomous driving, and with Hitachi Automotive for electrified Rs7,700 from Rs8,827 drivetrains); 3) Toyota: Historically though not very successful in managing associations, Toyota has gone ahead with tie-ups with players like Suzuki and Shareholding pattern Mazda albeit in differing ways even as it already has like Daihatsu, Hino in its fold. Jun Sep Dec ‘17 ‘17 ‘17 Suzuki and Toyota desire a win-win association; a huge test of India Promoters 56.2 56.2 56.2 commitment: As per the various joint announcements till date between Suzuki and Institutional investors 36.8 36.8 36.8 Toyota, Suzuki is expected to gain: a) access to Toyota’s electric vehicle (EV) MFs and UTI 6.3 6.0 5.6 technology without any capital contribution into R&D, and b) license to sell Corolla in FIs/Banks 5.5 5.5 5.4 FIIs 25.0 25.3 25.8 India. In return, Toyota will benefit from: a) Suzuki’s low-cost manufacturing in India Others 7.0 7.0 7.0 as it will supply it with electric vehicles; and b) license to sell Baleno and Brezza in Source: BSE India. The joint statements made together definitely resonate the desire to succeed in this arrangement, but we cannot help perceive that Maruti Suzuki India (MSIL) might have to do heavy lifting to fulfill Suzuki’s end of the bargain. Price chart Looking closer into distribution strength argument vis-à-vis Toyota: The street 11,000 believes that MSIL’s vast overall distribution network (~2,100 dealers) insulates it 9,000 from any significant volume loss in its sales channel vis-à-vis Toyota Kirloskar (~275 7,000 dealers. We tried mapping the dealership data on a state and city wise basis for both Toyota Kirloskar and NEXA (as MSIL’s Baleno is sold only via NEXA), and found a (Rs.) 5,000 significant locational overlap (>80%) between the two channels. Also, combining this 3,000 with the sales throughput/per dealer data of Toyota and MSIL it becomes evident 1,000 that Toyota dealerships remain on a strong footing in terms of volumes and could scale up further if MSIL supplies adequate volumes to them. Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Visible risks outweigh potential technology gain; cut peak multiples: Baleno and Brezza have been a huge success (together command 11.3% market share) for MSIL and instrumental in improving MSIL’s brand image. We believe the scales are currently tilted toward the risk of loss of market share and dominance vis-à-vis future benefits of EV technology. We thus cut our multiple to 22x FY20E EPS (earlier 24x). We downgrade the stock to SELL from Hold with a target price of Rs7,700/share. Market Cap Rs2,260bn/US$42.3bn Year to Mar FY17 FY18E FY19E FY20E Reuters/Bloomberg MRTI.BO /MSIL IN Revenue (Rs bn) 680.3 796.2 903.4 997.2 Shares Outstanding (mn) 302.1 Net Profit (Rs bn) 73.4 80.5 94.1 105.7 52-week Range (Rs) 9802/3237 EPS (Rs) 243.0 266.7 311.7 350.0 Research Analysts: Free Float (%) 43.8 % Chg YoY 36.8 9.8 16.9 12.3 Nishant Vass FII (%) 25.8 P/E (x) 37.6 34.2 29.3 26.1 [email protected] Daily Volume (US$/'000) 76,789 CEPS (Rs) 329.1 357.9 406.9 452.7 +91 22 6637 7260 Absolute Return 3m (%) (2.5) EV/E (x) 25.4 21.8 19.4 17.6 Venil Shah Absolute Return 12m (%) 49.1 Dividend Yield (%) 0.8 0.9 1.1 1.3 [email protected] +91 22 2277 7649 Sensex Return 3m (%) (1.9) RoCE (%) 25.3 26.4 26.6 26.0 Sensex Return 12m (%) 16.3 RoE (%) 24.7 23.0 23.2 22.7 Please refer to important disclosures at the end of this report Maruti Suzuki, April 16, 2018 ICICI Securities Is Japanese automotive market gravitating towards a ‘Big-3’? Japan’s automotive industry has remained fragmented for long but increasingly seems to be witnessing a trend of aggregation/collaboration against the backdrop of the industry undergoing severe shakeup. Old ways of building cars and strong sales and service aren’t proving to be enough for the consumers. New areas – such as cleaner powertrains like EVs, autonomous driving, artificial intelligence, and connected cars – are becoming especially important for buyers. Thus, OEMs are being caught in between ‘a rock and a hard place’ in terms of deciding how to address these challenges. Paths being adopted toward achieving the Japanese OEMs’ long term survival are: a) a few have chosen to independently invest but partner with technology giants to develop proprietary solutions; b) some have chosen to develop partnerships to share investment burden and reduce the learning curve disadvantage; and c) a few have been risk-averse / pragmatic to depend on outsourced technology from a possibly larger/competent entity. All are hoping for a win-win scenario in their respective ecosystems of partnerships and associations. For us, the big challenge is to be able evaluate the probabilities and timelines of success in such scenarios as all paths are likely to have different success quotient with differing time horizons. We try to take a closer look each of these three approaches: Table 1: Global Car makers’ volumes shows intense competition for top spot Sales volumes (mn) (mn units) CY12 CY13 CY14 CY15 CY16 CY17 Renault-Nissan-Mitsubishi# 9.10 9.30 9.60 9.50 9.96 10.61 VW 9.20 9.50 9.94 9.75 10.13 10.53 Toyota 9.70 9.80 10.06 9.98 10.01 10.20 GM** 9.30 9.70 9.92 9.84 9.96 9.60 Hyundai-Kia 7.10 7.40 7.70 7.70 7.82 7.27 Ford 5.70 6.30 6.30 6.60 6.66 6.61 Honda 3.80 4.30 4.60 4.70 4.97 5.19 FCA 4.20 4.40 4.40 4.60 4.72 4.74 PSA 3.00 2.80 2.90 2.97 3.15 3.60 Suzuki* 2.60 2.70 2.88 2.90 2.86 3.30 Daimler 1.70 1.80 2.00 2.30 2.54 2.77 BMW 1.80 2.00 2.10 2.20 2.37 2.46 Mazda 1.20 1.30 1.40 1.50 1.55 1.61 Source: Company, Bloomberg, I-Sec research | *includes consolidation of MSIL | **includes GM-SAIC-Wuling |#volumes adjusted for alliance Nissan Motor Co: Renault-Nissan-Mitsubishi is now a 19-year old Franco-Japanese automotive alliance which has led the way in terms of successful partnerships by scaling the peak of global autos (the alliance had sales of 10.61mn vehicles in 2017 and is also is the world’s largest EV manufacturer). This alliance got boosted in 2016 with the addition of Mitsubishi (Nissan bought 34% stake) into its fold as the latter struggled with the fuel-economy data scandal. 2 Maruti Suzuki, April 16, 2018 ICICI Securities Chart 1: Renault-Nissan-Mitsubishi Alliance structure Source: Company, I-Sec research The alliance has evolved significantly over the years in terms of synergy development and now has strategically agreed on the convergence of four core business functions: a) engineering, b) manufacturing and supply chain management, c) purchasing, and d) human resources. This has led to significant gains (EUR4.3bn) in the first year of implementation and the trend of synergy improvement is expected to increase in the estimate of the alliance. Be it on the engineering side ranging from co-development of platform architecture system to co-development and sharing of powertrains (~75% of powertrains are shared in the alliance) to common purchasing organisation, this alliance structure sets the strong fundamentals for keeping the win-win feeling amongst all stakeholders. Honda Motor Co.: The Japanese giant has decided to chart an alternate path toward meeting the seismic challenges in the automotive industry. It has historically ruled out any cross-ownerships / equity holdings in other OEMs; however, it has been steadily partnering with specialists who can bridge its learning gaps and make it future-ready, e.g.