Maruti Udyog review

Maruti Udyog ( Nomura)

June 2010 review

1. Domestic Car market to increase at 16% CAGR over next 5 years.
2. Better distribution to help maruti offset competition
3. Maruti is fast gaining markest share in the higher end segments.
4. The buy target is Rs. 1591.
5. Penetration of only 12.5 cars per 1000 people strong volume growth is expected in cars
6. Korea and China reached this position in 1984 and 2004 and after that their volumes grew by 25% CAGR.
7. It market share might come down over the next 2 years with Nano scaling up into the market but it should be able to increase its market share in the utility vehicles space with launch of Eeco and RIII.
8. It is expected the domestic volumes for grow at 15% CAGR for the next 5 years.
9. With improved road infrastructure and increase in income levels in the rural india the car penetration should increase. Maruti would benefit the most as it has an extensive distribution network which is 5 times that of GM and ford.
10. Currently the stock is trading at 12 F EPS and it is expected to touch 15 F EPS.
11. It is anticipated the volumes would still grow at 11% in the coming five years.
12. The Average selling Price (ASP) and Average Realization has increased 4-5% on an average over the past five years.
13. The company may hence post 12-15% increase in net sales
14. Market share concerns are more pronounced because of the foraying of Tata nano but it doesn’t compete directly with Maruti Suzuki
15. Replication of Maruti Distribution and Service Network is difficult
16. New product launches should keep the companys sales ticking.
17. MSIL produced 1.2 mn units and want to expand the capacities to 1.3 mn units before FY 12.
18. Indian Auto Industry is cost competitive and maruti has a huge advantage in that domain
19. If GST gets implemented it would bring down the car prices by 4% and hence boosting the sales.
20. It will also launch KIzashi which will be a premium segment launch and a new variant in Alto.
21. It will also launch it Bi-fuel CNG engine in India. All this would help company growth.
22. Commodity prices if fall further would result in better margins for the company.
23. If the yen depreciates by 1% the margins would improve by 0.16%. This is because MSIL imports 20% parts from Japan of its net sales.
24. This risk lies in the exports to Europe and depreciation of Euro would impact the realization from the export business.
25. New launches from competitor would eat up the market share of the company.
26. Company now earns 5% through its subsidiaries.
27. The estimate is based on 9% GDP growth for India. If the growth slows down the volumes would get impacted adversely.
28. A sharp increase in Commodity prices would negatively impact the margins as it would be unable to pass the increases to the customer given the increased competition in the car market.
29. MSIL generates 12% sales from Europe. Any adverse conditions in Europe would impact the demand adversely for maruti and hence its margins.
30. Also with Euro weaking the margin pressure would further increase.
31. However we expect the company would have hedged its positions in EURO in the first quarter of this year.
32. Strengthening of Yen would impact margins negatively.
33. It has been assumed an earnings CAGR of 12% and terminal ROE at 15%.
34. Maruti has long traded in line with Sensex or at a slight premium.
35. MSIL currently operated on 100% capacity and therefore focusing on Higher end segments will help it generate higher returns.
36. Even if the market share of maruti reduces from 50% to 45% the drop would be majorly owing to Nano launch however nano doesn’t compete directly with marutis portfolio.
37. Hyundai has less than half number of dealer outlets.
38. MSIL has 2868 service stations across the country, ensuring availability of parts and service across the length and breadth of the country.
39. A typical dealership gets 75% revenue from servicing and new car sales. However new dealerships get a major chunk from the new car sales. If GM and ford which are trying to expand their dealerships are not able to achieve sufficient new car sales it would be difficult for the dealerships to become viable
40. 56% cars on Indian roads are Maruti which presents a huge servicing opportunity.
41. It has been growing rapidly in the A3 segment
42. Maruti has led JD power customer satisfaction survey for many years now.
43. Maruti Wagon R is competitively priced in comparison to Ford figo and GM Beat. It has low cost of servicing and residual value.
44. Maruti has increased its focus of R&D. The new wagon R with CNG variant may be launched soon and also a BI-fuel engine.
45. It has been successful in the UV segment with the launch of EECO. It has a waiting list of more than a month. With RIII launch in 2011 there is greater scope in this category
46. Maruti is planning a capex of 17bn to expand the manesar capacity by 250000 units.
47. Indian auto industry is highly cost competitive and product mix is skewed to the lower end. Thus other global players have been unsuccessful as it doesn’t fit the cost economics.
48. With 19% stake of VW in MSIL parent, it would synergies the capabilities of VW to foray into high ended cars.