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Big bang EV entry announced

Suzuki Motor Corporation has signed a MoU with Gujarat government to invest Rs104.4 bn towards EVs. Rs31bn will be invested towards expanding the capacity at SMG Gujarat plant for EVs and Rs73 bn towards battery manufacturing. This is the first big announcement towards EV from Suzuki in India and it will benefit Maruti Suzuki. The planned year for the investment is 2025 for capacity addition and 2026 for battery manufacturing. This will aide MSIL’s plan to launch its first EV in year 2025 in our view. SMG is also one of the company selected for Auto OEM PLI scheme. However, it is missing from the Advanced chemistry cell manufacturing PLI applicants list. On the hind side, considering the existing transfer pricing arrangement the plant will weigh on MSIL’s EBITDA margins until it is fully ramped-up. Maintain Reduce

Investment announcement addresses a significant overhang

Capex announcement by Suzuki addresses a key gap in MSIL’s future product strategy. The size of Rs104.4 bn was necessary since both SMC and MSIL don’t have the technology for EVs. Rs73bn towards battery manufacturing should be towards Lithium ion cell in our view and with the thumb rule of USD80mn per GWh, we expect the facility to be capable of 12.5GWh battery capacity. Considering an average of 40kWh requirement per car, the plant can support about 312k vehicles, i.e 14% of the total capacity of MSIL. SMC will be investing Rs31bn towards expanding the existing capacity at SMG Gujarat plant for EVs. With this, company shared its mission to achieve carbon neutrality with small cars. The planned year for the investment is 2025 for increasing the capacity of vehicle production and 2026 for battery manufacturing.

Two sides of the coin

This news is both positive and negative. Positive is that the investment is towards EVs. Negative is, assuming that Maruti Suzuki will be the primary user of the facilities similar to the earlier SMG arrangement, the transfer pricing with higher depreciation cost will hurt Maruti’s EBITDA margins until the production ramps up. However, in the current arrangement, SMG is not making any EBIT and with similar arrangement, earning will not be impacted. Also, there is an opportunity cost of better ROIC if MSIL utilizes its own cash pool (~Rs400bn cash including Investments)

Lack of UV product, increasing competition and slowdown in small cars to continue to hurt market share. CNG sales is on track to replace diesel segment sales.

Maruti has lost 740bps of market share in the domestic PV market over the last 2 years from the peak of 51% on the back of industry shift to SUV segment. However, there is some respite in the form improvement in CNG, SCV, Exports and Toyota sales. Commodity prices continue to affect the margins and rising competition could restrict price increases as an attempt to arrest market share losses. We have Cut our FY22/23 margins by 60bps each to 6.6%/9.8% resulting in an EPS cut of 9.4%/5.8% for FY22/23. Market share loss on weaker SUV portfolio will continue to haunt company’s valuation in our view. Maintain reduce with revised price target of Rs7,187

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