Published on 17/08/2022 9:21:20 AM | Source: Motilal Oswal Financial Services Ltd

Buy Maruti Suzuki Ltd For Target Rs.11,300 -Motilal Oswal Financial Services Ltd

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Aims to plug gaps in its portfolio and technologies

Targets 2m volumes in FY23 and regaining 50% market share

MSIL’s FY22 Annual Report highlighted: a) its focus on SUVs by launching several products, b) its export focus, c) kick-start of electrification through strong Hybrids in FY23 and BEV in FY25, and d) leveraging multiple means to meet its end objective of reducing CO2 emissions. The management is targeting volumes of 2m units in FY23 and is confident of regaining its 50% market share in the near future. Here are the five things that we found interesting in MSIL’s FY22 Annual Report.


* Focusses on the SUV segment by launching new age products to fill product gaps: While the SUV segment continued to grow faster in FY22, MSIL faced some product gaps in this segment, resulting in a loss in market share. It is strengthening its presence in the SUV segment, with the recent launch of the Brezza and Grand Vitara. It plans to further solidly its presence with additional launches. Beyond SUV, it has been working on products in other segments and new-age features like heads-up display (HUD), 360 view camera, SmartPlay Pro+ infotainment system with a HD display, inbuilt next-gen Suzuki connect, electronic stability program (ESP), ventilated seats, etc.


* Targets 2m units in FY23 and regaining 50% market share in the near future: In FY23, vehicle production will increase as the availability of semiconductors has improved. MSIL has also made further improvisations to enhance production. This, coupled with recently launched Brezza and Grand Vitara, will help it reach 2m units in FY23. With an expansion and refreshment of its product portfolio, and offerings of new age features and fuel-efficient technologies, it is looking to regain its market share of 50% in the near future.


* Kicks off the electrification drive with a strong Hybrid: With the introduction of a strong hybrid technology in Grand Vitara, MSIL has taken the first step towards electrification. This technology delivers a fuel efficiency of 27.97km/liter in official tests, which is almost 10 km/ liter higher than its competitors. CO2 emissions are lower by 26.4% and energy efficiency is higher by 35.9% as compared to its ICE variant. It plans to launch its first BEV in CY25. The parent plants to invest ~INR104b in the manufacture of EVs and batteries in SMG. It has localized the manufacture of its battery pack through Toshiba-Denso-Suzuki joint venture (TDSG) and will be supplying batteries for the strong Hybrid. TDSG is India’s first lithium-ion battery manufacturing plant with cell level localization.


* Multiple means to meet the end objective of CO2 reduction: In the run-up to full electrification, the management plans to reduce CO2 emissions via the use of CNG, ethanol, biogas, and strong Hybrids. CNG has seen strong traction in FY22, up 48% YoY, led by a 43% increase in CNG outlets to 4,433. CNG vehicles constituted 17% of MSIL’s domestic volumes (v/s 12% in FY21). With the government’s focus on CNG and its aim of expanding its reach to 17k outlets, the demand for CNG vehicles is expected to remain high. MSIL’s petrol models are already compatible with 10% ethanol blended petrol (EBP). It is getting ready for 20% EBP (applicable from Apr’23). Its CNG vehicles can run on compressed biogas without any modification.


* Exports – FY22 was a year of inflection: Exports grew 148% in FY22 as the semiconductor shortages did not majorly affect its export models. Exports to Africa, particularly South Africa, grew 200% and accounted for ~50% of the total export volume in FY22, led by a better demand environment and its efforts in developing these markets over the past few years. Besides expanding its product portfolio and its reach, its best practices are being implemented to further enhance customer satisfaction. Supplies to Toyota, via SMC in the African market, also boosted exports. It also saw a strong growth in exports to Latin America and Middle East, which are among its other important export destinations


Other highlights

* Transition to Phase II of BS-VI emission norms nears the half way mark: Out of a total of 61 applications, MSIL has transitioned 31 applications to BS-VI Phase-II by Apr’22. It is planning to complete the rest prior to the regulatory deadline.

* e-financing off to a good start: Maruti Suzuki Smart Finance (MSSF), an online end-to-end car finance facility, is now available across India and is being offered by 16 financiers. Till Mar’22, MSSF has disbursed over INR170b worth of loans to over 313k customers. With this, MSIL has digitalized 24 out of the 26 customer interaction points while buying a car. The remaining two interaction points are test drive and delivery of the vehicle.

* New plant can potentially become one of the biggest in the world: It has finalized land purchase at Kharkhoda (Haryana) to set up a new plant, with the first/second phase of commissioning in CY25/CY26. This site has the potential to become one of the largest car manufacturing sites globally. It is also increasing its annual capacity at Manesar by another 100k units

* Kick starts pilot project on company owned dealer operated (CODO) outlets: MSIL began its CODO pilot project in FY22 with two outlets on freehold land. There are four more CODO outlets under various stages of preparation. It plans to increase the number of CODO outlets on its acquired land parcels.

* JV for scrapping begins operations in FY22: Maruti Suzuki Toyotsu India Pvt. (MSTI), a JV for recycling of vehicles in India, began operations in FY22. In the first six months of its operations, it helped recover ~0.1m kg of steel and 19,000 kg of aluminum from scrapped vehicles.


Highlights from the financial statements

* MSIL saw savings of INR1.7b/INR3b in FY22 from localization/VAVE (v/s INR1.4b/ INR2.5b in FY21). Total savings stood at 0.5% of total sales (v/s 0.6% in FY21). Despite these savings, RM cost, as a percentage of sales, grew 330bp due to commodity cost inflation.

* Royalty declined by 120bp to 3.4% (the lowest since FY10) as there were no model launches in the last two years.

* Core working capital days rose to -17 days from -30 days in FY21 due to a reduction in payable days

* Weak operating performance and higher working capital led to a sharp decline in CFO to INR17.9b in FY22 from INR88.4b in FY21). This, coupled with an increase in capex, led to the first negative FCF in a decade (at -INR15.3b v/s INR65b in FY21)

* Net cash fell by ~INR9b to INR434b, which is ~80% of capital employed (v/s ~82.5% in FY21).

* Considering a weak operating performance in a COVID-affected FY22, RoE fell to 7% (down 120bp YoY). This is lowest RoE in MSIL’s listed history. However, RoIC improved by 7.9pp to 26.8% in FY22.


Valuation and view

* Strong demand and favorable product lifecycle for MSIL augurs well for market share and margin. We expect a recovery in both market share and margin in 2HFY23, led by an improvement in supplies and mix, a favorable product lifecycle, RM and forex benefits, and operating leverage.

* The stock trades at 39x/23.5x FY23E/FY24E consolidated EPS. We maintain our Buy rating with a TP of INR11,300 (27x Sep’24E consolidated EPS)


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