MSIL have good upside potential due to recent corrections in commodity... MSIL have good upside potential due to recent corrections in commodity prices and Fx. Read more

Summary

Return of product lifecycle to drive market share, Recent corrections in commodity prices, Fx provide good upside opportunities to the MSIL estimates.

Maruti Suzuki (MSIL)’s product pipeline has just kick-started with upgrades of key models and it is on the cusp of launching new models. While return of product lifecycle will drive market share recovery (~600bp by end-FY24E), strong demand, improving supplies and stable commodity prices will propel EBIT margin improvement of ~550bp for MSIL. The recent decline in commodity prices and favorable JPYINR movement can add ~180bp to margins (not part of our estimates) and 17% EPS upgrade for FY24E. We estimate MSIL with a TP of ~INR10,000 (premised on ~27x Jun’24E consol. EPS). 

Product lifecycle has just kick-started after a gap of almost three years:

1. After a gap of almost three years, MSIL’s product pipeline has just kick- started with an exciting line-up of launches over the next 2-2.5 years. It has launched upgraded Celerio, and mid-cycle refresh of Baleno as well as XL6. Going forward, MSIL would be launching: new models (four SUVs), platform upgrade (Alto) and mid-cycle refresh (Brezza).

2. Four new SUV brands are lined up for launch over the next couple of years to plug-in the gaps in its portfolio. Based on our channel checks, MSIL is planning to replicate its highly successful product laddering strategy in the SUV segment, thereby giving customers an option of an SUV at every price point.

3. While the SUV based on Baleno platform will provide product laddering between Brezza and S-Cross, the SUV co-developed with Toyota will open up the UV1 segment (currently dominated by Hyundai Creta and Kia Seltos) and Jimny would compete in the niche segment of Thar. Further, it plans to launch a mid-size MPV sitting in between best-sellers such as Ertiga and Toyota’s Innova.

4. Besides, Alto would get its much needed complete platform upgrade after a gap of 10 years. This would be the second platform upgrade after Celerio.

5. MSIL is also launching the mid-cycle refresh of Brezza (likely on 30th Jun’22), after the recent mid-cycle refreshes of Baleno and XL6.

PV segment’s market share highly correlated with product lifecycles:

1. Our analysis suggests that market shares in the PV segment are very highly correlated with the product lifecycles. MSIL benefits from its favorable product pipeline over FY14-19 with market share improvement of ~9pp to ~51%, benefitting from the launches of Celerio, Ciaz, S-Cross, Baleno, Brezza, Ignis, XL6 and Espresso. Subsequently, the lack of MSIL’s product launches coupled with substantial product launches from competition led to a declining market share of 8pp to 43.4% over FY19-22 for MSIL.

2. Similarly, other PV players exhibited such high correlation. TTMT gained 5.8pp market share to 12.2% over FY20-22, driven by five new products since 2017. MM gained 160bp market share to 7.4% (of the domestic PV market) since the launch of Thar in Oct’21.

3. While Kia ramped-up to 6.1% market share since entry in India in Aug’19 with four new products, its market share improved a meager 40bp in FY22 despite the full benefit of Sonet launch and part benefit of Carens launch. Conversely, Hyundai lost 260bp market share YoY (to 14.8%) in FY22 as it only had two model upgrades since Jun’20 along with Alcazar launch.

4. Based on MSIL’s launch pipeline of four new SUVs, one platform upgrade and one mid-cycle refresh, we estimate its market share to improve ~600bp to ~49% by end-FY24E over FY22.

Demand remains good, though supply issues crop up intermittently:

1. Demand for PVs remains robust with healthy traction in inquiries and bookings. In the domestic market, the unfulfilled order book has increased to ~295k units as of May’22 (of which 130k was CNG) and has consistently remained above ~200k units since 3QFY21 due to healthy demand and chip shortages.

2. MSIL has also been seeing substantial traction in exports, led by its three- pronged approach to: a) expand the product portfolio, b) expand the network in existing markets, and c) add new markets. It is focused on implementing the best practices of the India business in these markets. Additionally, the Toyota partnership is supporting the company business in Africa and Latin America. As a result, MSIL’s export volumes have consistently averaged above 20,000/ month since Jul’21 (v/s <10,000/month earlier).

3. The semiconductor shortage has been gradually improving, though it crops up intermittently like in Mar-Apr’22 before production recovering in May’22.

EBIT margin: Headwinds stabilizing, if not receding:

1. MSIL’s profitability has been adversely impacted in the last three years by: a) a weak product lifecycle, b) unprecedented commodity cost inflation in base commodities and precious metals, and c) multiple headwinds to volumes, resulting in an operating deleverage.

2. This has resulted in a sharp erosion in its gross margin (~610bp) and EBIT margin (~570bp) over FY19–FY22. However, stable commodity cost during 4QFY22 and benefit of pricing action were reflected in gross margin and EBIT improvement of 180bp and 270bp QoQ in 4QFY22, respectively.

3. Improving supplies and product mix, and stable commodity prices would drive an EBIT margin expansion of 550bp to 8.8% over FY22–24E.

4. Its estimates do not factor in any benefit from:a)the product mix improvement led by new product launches, b) ~80bp gain from the recent decline in spot commodity cost (as a % of sales) to 15.8% (from 16.6% in 4QFY22) and ~100bp benefit of favourable JPYINR movement (spot v/s FY22 average).

5. Lastly, MSIL had witnessed an adverse impact of declining interest rates on its treasury, as reflected in almost halving of other income over FY20-22 or the effective yield on treasury plunging to 4.3% in FY22 from 9.3% in FY20. While we are estimating 5% yield in FY24, if this goes up 2pp, it will drive almost ~INR10b increase in other income (on treasury of over INR500b) or ~8% upgrade in our FY24E EPS. 

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Valuation and view:

Strong demand, improving chip supplies, moderating commodity inflation and favourable Fx would support margin recovery. Robust demand coupled with strong recoveries in both market share (+600bp) and margins (+550bp) over FY22-24E, would drive 66% CAGR in EPS. The Gujarat plant’s arrangement with its parent Suzuki would render MSIL’s business as asset-light, allowing the management to focus on marketing. We expect FCF generation to improve to ~INR136b over FY22-24 (v/s ~INR84b in FY19-21) after budgeting for an annual capex of ~INR40b. RoCE is estimated to improve gradually to ~21.7% by FY24 from 8.7% in FY22.