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Product launches to drive volume outperformance

Mix and operating leverage to drive margin recovery

Maruti Suzuki (MSIL)’s is expected to outperform in a moderating growth environment in FY24E, driven by its promising product pipeline. Although market share recovery has not happened despite the success of Grand Vitara, we estimate MSIL’s market share to recover to ~44.4% by FY25E with the launch of three more new products in the next six to nine months. This recovery in market share, along with a favorable mix of rising SUV share and operating leverage, will help MSIL sustain margin recovery. Further, we expect MSIL to benefit from its strength in CNG and strong hybrid in the face of tighter emission norms, especially with the withdrawal of small diesel engine and increasing cost of mid-size diesel in BS-6 Phase-2 era. We have a BUY rating on the stock with a TP of ~INR10,400

Demand growth to normalize, MSIL to outperform industry

* Domestic PV demand has experienced a robust recovery since the initial impact of the first lockdown. The recovery has been driven by Covid-induced shift toward personal mobility and pent-up demand. Domestic PV volumes registered a CAGR of ~20% over FY21-23E, registering a new high of 3.7m units in FY23E (v/s previous peak of 3.4m in FY19).

* However, due to increase in interest rates and the fading pent-up demand (excluding Entry level segment), the ground growth momentum is now slowly moderating. Hence, the industry expects domestic volumes to grow at 5-7% in FY24E (v/s 27%-28% in FY23E).

* We expect MSIL to outperform the underlying industry in FY24, led by upcoming products viz Jimny and Fronx, the likely launch of mid-sized MPV in 2HCY23, and the successful launch of Grand Vitara in Sep-22.

* We estimate MSILs volumes to grow 10.5%/7% in FY24/FY25. The outperformance in FY24E is expected to be driven by new product launches, industry-level growth in existing SUVs/MPVs, and little growth in the car segment for MSIL.

MSIL’s market share recovery to gather momentum in FY24

* Although the launch of Grand Vitara and upgraded Brezza were successful, it had no significant impact on MSIL’s recovery of domestic PV market share. While MSIL’s market share in the SUV segment improved to ~20% by 3QFY23 (from 19.5% in FY22), it lost market share in the car segment (64.1% in 3QFY23 vs 65.8% in FY22), resulting in overall market share dipping to 41.2% in 3QFY23 (from 43.4% in FY22).

* With three more product launches lined up in the fast-growing SUV segment over the next six to nine months, we expect MSIL’s market share recovery to gather momentum. The recent transition to tighter emission norms has led to several players exiting the small diesel engine segment and this might boost MSIL’s market share recovery

* We estimate MSIL’s market share to rebound to 44.4% by FY25 (from 41% in FY23E v/s peak of 51.3% in FY19). This assumes no recovery in its stronghold segment of hatchback cars (~60% of its domestic volumes), where MSIL enjoys ~70% of the market share. Additionally, we have not factored in any benefits from tighter emission norms, which could be advantageous for MSIL’s CNG and strong hybrid portfolio.

Margin recovery to continue, led by improving mix and operating leverage

* We expect the favorable product lifecycle, focused on SUV, to reflect in the P&L statement, as there will be an increase in the share of SUV segment in the overall volumes. MSIL’s contribution from the SUV segment is estimated to rise to ~31% by FY25E from 22% in FY23E. This would drive further improvement in ASPs, leading to 4.7% CAGR in ASP over FY23E-25E to ~INR632.5k/unit.

* With estimated volume CAGR of ~9% over FY23-25, we expect operating leverage to contribute 90bp to EBIT margins over the period.

* Hence, we estimate EBIT margins to improve 150bp over FY23E to 8.5% by FY25E. This estimation accounts for the following factors a) improvement in mix, b) operating leverage benefit, c) increase in discounts by 70bp to 3.2% of ASP (vs est. ~2.5% for FY23E), d) JPY/INR of 0.6203 (v/s spot of 0.624), and e) increase in royalty to 4% (v/s 3.4% in FY22 and 3.8% in 9MFY23).

MSIL to benefit from recent emission norm changes

* The recent emission transition of CAFE II (Corporate Average Fuel Economy) from Apr-22 and BS6 Phase-2 norms from Apr-23 are expected to materially influence the domestic PV industry.

* According to Energy Conservation Bill, under CAFE II norms, there will be a penalty for exceeding targeted fleet CO2 emissions, such as INR25,000/vehicle for up to 4.7gms/Km excess emission and INR50,000/vehicle for exceeding 4.7gms/Km emission. Although MSIL is in compliance with CAFE II norms, as per media article, many of its key competitors may face a substantial penalty for exceeding the emission targets.

* Further, BS6 Phase-2 norms has forced many OEMs to withdraw small diesel engines in the compact car and sedan segment. Additionally, it has led to a substantial cost increase of up to INR100k for mid-sized diesel engines (price hike in Creta diesel so far of INR80k/unit in CY23YTD). MSIL’s CNG and strong hybrid portfolio should benefit from the resultant impact on diesel portfolio of competitors.

* Lastly, MSIL is on track to launch its first-born electric vehicle in FY25 and has six EV launches planned by 2030. Apart from EVs, MSIL has multi-fuel approach to carbon neutrality and includes strong hybrid, CNG, biogas, and ethanol-blended fuels.

Valuation and view

* Reasonable demand environment and favorable product lifecycle for MSIL augur well for market share and margins. We expect a recovery in market share and the margins to gather momentum in FY24, led by an improvement in supplies, promising product lifecycle, mix, and operating leverage.

* We estimate revenue/EBIT/PAT CAGR of 14%/25%/22.6% over FY23-25, driving FCF generation to ~INR219.4b over the period (v/s ~INR50b over FY20-22), after budgeting for cumulative capex of ~INR170b. RoCE is estimated to improve gradually to ~21.4% by FY25 from 17.5% in FY23E.

* The stock trades at 24.2x/20.5x FY24E/FY25E consolidated EPS. We have a Buy rating on the stock with a TP of INR10,400 (Mar'25E consolidated EPS).

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