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Re-gaining momentum

Maruti Suzuki India Ltd. (MSIL) is India’s largest passenger vehicles (PV) company with a commanding market share of ~48% in the domestic market with ~1.2 million vehicles sold in FY21. 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 ~1.58 million vehicles per year. In addition, it has set up a plant in Gujarat with a capacity of 0.5 million units taking its overall production capacity to over 2 million units per year. Further, MSIL boasts of its wide distribution network with ~2,765 channels (including NEXA) and has 3,864 service workshops covering 1,914 cities. Further, MSIL is the largest exporter of passenger cars from India.

Investment Rationale

* Domestic PV industry growth to continue its recovery: The recent recovery in the domestic PV industry has been remarkable over the last 3 quarters, after getting severely impacted due to lockdown restrictions in Q1FY20. The re-opening of the economy, easing financing conditions, low-interest rates, strong rural income, pent-up and festive demand has aided recovery. Going forward, while the recent surge in COVID-19 cases would impact volume recovery in Q1FY22, we expect the growth momentum to remain strong in FY22 and FY23 on the back of a low base, healthy growth in rural income and increased preference for personal mobility. Further, low-interest rates and adequate liquidity would also aid revival for the PV industry.

* MSIL to strengthen its leadership position: MSIL lost market share in FY21 (from 51% in FY20 to 47.7% in FY21) mainly due to a decline in market share in the Utility Vehicle segment. In the passenger car segment, MSIL has managed to increase its market share considerably over the last five years to 62% in FY21 (v/s 53% in FY16). This has been largely on account of its strong product portfolio, wide distribution network and sales service. We believe MSIL would regain its lost market share and strengthen its leadership position in the domestic PV industry due to its strong presence in the entry-level segment, strong brand connect and new launches.

Outlook & Valuation:

We continue to remain constructive on long-term growth prospects of the industry given the low penetration of cars in India as compared to other major economies, economic recovery, increase in per capita income, low-interest rate and higher rural income. MSIL is better placed than peers in the PV space given its leadership position, strong product portfolio and wide distribution network. On the operational front, we expect margins could remain under pressure in the near term due to rising commodity prices and lower volumes. However, price hikes, better product mix and cost rationalization measures would aid margin improvement in FY22 and FY23. We recommend a Buy on the stock with a target price of Rs. 8,289.

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