Count on it
Maruti Suzuki India Ltd. (MSIL) is India’s largest passenger vehicles company with a commanding market share of ~50% in domestic market with ~1.65 million vehicles sold in FY18. It is a subsidiary of Suzuki Motor Corporation, Japan. MSIL has two manufacturing plants located at Gurugram and Manesar in Haryana with an installed capacity of ~1.56 million vehicles per year. In addition, with strong demand outlook, MSIL has set up a plant in Gujarat (7.5 lakh vehicles) in order to achieve its target of selling 2 million vehicles by 2020. MSIL has one of the largest sales networks with ~2,627 channels (including NEXA) and has 3,403 service workshops covering in 1,659 cities. Further, MSIL is the largest exporter of passenger cars from India.
* Unlike other developed countries, the Indian car market is distinctive with 75% of the cars sold below 4 meters in length and cost under Rs. 6.5 lakhs at factory level. However, the penetration of four wheelers in India is lower as compared to other developed/developing countries. We believe with government’s increased focus on increasing rural income and overall increase in per capita income bodes well for four wheeler passenger vehicle industry. While there are certain challenges in the near term due to rising interest rates, firm crude oil prices and depreciating rupee, we believe that long term growth story remains intact for the passenger vehicles industry.
* Despite increase in competition, MSIL has managed to increase its market share by ~1,055bps over FY13-18 to ~50% on account of its strong product portfolio, wide distribution network and sales service. We believe with strong industry growth prospects backed by rising rural income coupled with MSIL’s rising share of premium products, new product launches, and increased focus from the parent company (post its recent exit from China business) augurs well for growth prospects of the company.
Outlook & Valuation:
We believe the concern over growth prospects for the passenger vehicles industry is largely over played as witnessed by the slowdown in a seasonally weak quarter’s sales volume numbers for Q2FY19 (MSIL domestic volume down 1.2%). The slowdown was mainly on account of delayed festive season demand, floods in Kerala coupled with deteriorating macros (rising interest rates and fuel costs). However, we remain optimistic of a double digit volume growth in FY19 led by continued strength in rural markets which is largely led by rising rural income and implementation of MSP by the government. While we do not rule out a weak performance in Q2FY19 due to dismal volume growth, higher commodity cost and adverse currency movement, we believe that going forward revival in demand, rising market share, premiumization of portfolio and cost rationalization measures would drive earnings growth for the company. Hence, we recommend a Buy on the stock with a target price of Rs. 8,677.
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