Updated: Feb 15
Company Name – Maruti Suzuki India Limited (Maruti Suzuki)
Current Share Price – INR 7,906 (Jan 7, 2022)
Market Cap – INR 2,38,103 cr
1. What is interesting about the stock?
Some advertisements (like the one above) leave an everlasting impression due to the pertinence of the message. Remember the little Sikh boy saying “Papa ki karaan, petrol khatam hi nahin haunda”, or the liquor baron look alike buying a yacht whose main consideration was “Kitna deti hai?”, or the young boy in Ladakh nodding in affirmative when asked about a nearby Maruti service station in the middle of barren Ladhaki terrain? Maruti Suzuki has been India’s leading passenger vehicles brand because it understands the psyche of the cost conscious (purchase price, maintenance cost and resale value) Indian car buyer to perfection and is able to cater to him/her in every nook and corner of the country. These factors have helped the Company retain its pole position with 7 of the top 10 models sold in a month usually belonging to Maruti Suzuki.
Maruti Suzuki India is a subsidiary of Suzuki Motor Corporation (SMC), Japan. The Company has two manufacturing facilities located in Gurugram and Manesar in Haryana, with a production capacity of 1.5 Mn units per annum. Suzuki Motor Gujarat Pvt. Ltd. (SMG), a subsidiary of SMC, was set up in Hansalpur, Gujarat in 2017 and has an additional annual production capacity of 0.75 Mn units resulting in a total capacity of 2.25 Mn units. Maruti sells 14 car models through ~1,050 car dealers in 33 states and 280 cities and has over 4,000 service stations.
In a country where Ford, GM and Fiat eventually threw the towel, consistently maintaining almost 50% share is truly remarkable. Between FY15 and FY20, the Company’s share in domestic passenger vehicles segment grew from 45% to 51% in terms of units sold. However, things are now beginning to become uncomfortable. Maruti’s market share had dropped to 48.5% in FY21 due to lack of product launches. What’s even more worrisome is that between April to October 2021, Maruti’s market share had fallen drastically to 42.7%. Meanwhile, Tata Motors market share has grown to 11.1% in the same period from 7.7% in FY21. In the first 9 months of FY22, Maruti Suzuki’s sales have grown by ~20% while it has grown by ~77% for Tata Motors’ passenger vehicles business. Further, domestic sales for Maruti have grown by ~10% during this period. Given the importance Tata Motors has been laying on well designed and well packaged products, it seems logical to conclude that Maruti is losing ground on product desirability.
Maruti has clearly been late to the SUV and EV party with course correction resulting in plans to launch 6 new SUVs in the next 3 years. As far as EVs are concerned, the Company is in no hurry and believes it should wait till affordability improves. Another reason for the loss of ground in FY22 has been the reduced sales due to semiconductor shortage.
The silver lining has been improving exports. In the first 9 months of FY22, ~170,000 units have been exported by Maruti Suzuki. Africa is a large market for Maruti with South Africa being a key contributor due to Jimny’s popularity and expanding distribution network on the back of the tie-up with Toyota.
2. Key Historical Financials
FY20 and FY21 were troublesome years for the Company with revenue declining by 10% CAGR over the 2 year period and PAT declining by 24% CAGR.
The NBFC crisis that led to an increase in borrowing costs and enhanced application rejection rate (from 3-4% to 15-20%), BS VI emission norms impacting price of entry level cars by as much as 20% and COVID-19 have all contributed to the declining sales.
Semi-conductor shortage coupled with high fixed costs of the operations, due to the take-or-pay capacity arrangement with the Suzuki Gujarat plant has led to consistently declining revenue and profitability margins.
3. What is my view on company valuation?
Maruti Suzuki is currently trading at EV/EBITDA (TTM) ratio of c. 40x and P/E (TTM) ratio of c. 57x. Tata Motors on the other hand is trading at EV/EBITDA (TTM) ratio of c. 8.3x. Given that Maruti has been losing market share, the current valuation seems to be expensive. However, like cricket commentators often say, form is temporary but class is permanent. If Maruti can get its strategy on customer preferences right (SUV, EV), launch new and attractive products and restructure its current fixed cost arrangement with Suzuki Gujarat plant, it could justify these valuations.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Product launches that are dated and not in line with competitor offerings
Late introduction of electric vehicles
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.