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UBS Investment Research
Maruti Suzuki India
Addressing investor concerns
Maruti market share has been stable
In this note, we look to address key questions received from investors on Maruti. In
9MFY11, Maruti has not lost any market share in the A2 and A3 segment which
account for 82% of its domestic volumes over FY10 despite entry of Ford, VW and
Nissan into the A2 segment. The co. has gained market share in the UV segment.
While, we expect Toyota to gain market share with Etios launch, we expect
Maruti’s market share to decline only 150bps by FY13 from current 44.7%.
Toyota Etios pricing is not disruptive
Toyota Etios pricing on a comparable basis is 8%-10% above Maruti model. We
therefore do not see any case for increasing margin concerns due to competitive
pressure for Maruti. Most players (Hyundai, Tata Motors, GM) have taken a price
hike due to cost pressures in Jan’11. We therefore see limited risk of irrational
price based competition.
Q4FY11 unlikely to see further drop in EBITDA margins
Q3FY11 saw 120bps of margin impact due to higher seasonal discounts and salary
arrears, which will reverse in Q4. Plus the co. has taken a small price increase in
Jan’11. We therefore believe the co. has enough levers to manage raw material cost
increases on a sequential basis in Q4FY11. Further, we believe valuations at
12xFY12 EPS are already factoring in potential downside to existing margins.
Valuation: Maintain Buy Rating, PT Rs 1,700
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.3%.
Competitive Scenario
Breakdown of Maruti’s product category and mkt share? And the
viable competitor in each category and their mkt share. Where is the
threat most apparent?
We believe Hyundai followed by Toyota are likely to remain the key
competitors for Maruti over the medium term. FY12 will see launches from both
these players in the A2 segment.
A2 segment (71% of Maruti and 58% of Industry
domestic vols)
This is the key segment both in terms of competitive activity and volumes. All
competitors launching in this segment as it accounts for bulk of the market. The
segment has seen launches from GM (Beat), VW (Polo), Ford (Figo) and Nissan
(Micra) - in Q4FY10 and Q1FY11. Toyota launch of Etios Liva is expected in
Apr'11. Hyundai expected to launch a new product sometime later this year at
Rs 300k price point to compete with the Maruti Alto. So A2 segment will
continue to remain in focus in terms of volume and market share for all cos.
The price point ranges from Rs 260k - 600k. We believe the segment is getting
split with Rs 260k - 400k (the low to mid segment) - the entry and premium
entry vehicles. Maruti dominates this market with Alto (biggest selling model in
India), Wagon R and Estilo. Key competitors here are Hyundai (i10, Santro) and
Tata (Indica). Ford and GM have increased their presence with new launches in
the last 1 year while Tata Motors - Indica has been continously losing market
share.
A2 premium (Price point: Rs 400k – Rs 600k) is larger hatchbacks and diesel
variants. Maruti is again dominant here with Swift and Ritz. Hyundai (i20) and
VW (Polo) are the other key players. Toyota's upcoming Etios Liva will also be
in this segment.
Overall Maruti's market share has recovered close to previous level of 60% for
the segment despite significant influx of competition during the year. We
believe this is a result of strong growth in Alto with launch of K10 variant in
Aug’10 as well as continuing strong growth in rural markets (outside Top 100
cities).
A3 segment (11% of Maruti and 14% of Industry vols)
Key players are really Maruti with its Swift Dzire and Tata Motors with its
Indigo Manza. Recently launched Toyota Etios also in this segment and is likely
to be the key new competitor. Hyundai, Ford and GM have been losing ground
in this segment. At the premium end - Key player is Honda City. New VW
Vento is also likely to successful given it has diesel option which Honda doesn't
have. Maruti SX4 at the premium end has seen limited success but this could
change with the launch of diesel SX4 expected shortly. We expect Tata Motors
to lose some ground post Toyota launch. Maruti's market share has continued to
be steady. We dont expect Maruti to lose market share given they still have 2-3
mths waiting list for Swift Dzire the key volume driver in the segment.
UV segment (12% of Maruti and 22% of Industry vols)
The segment comprises of Vans and SUV's. Maruti is really the dominant player
in Vans with Omni and Eeco (launched in Feb'10). Eeco launch has been v.
successful despite lack of diesel engine driving market share gains for Maruti.
Most of the vehicles in ex-Maruti in this category are really diesel vehicles.
SUV's segment dominated by M&M. Maruti is likely to see limited direct
competition to Maruti in this segment given low price point of Rs 200k - 300k
for its products. Tata Motors vans are really variants of Tata Ace mini truck and
used for transportation in sub-urban areas.
Honda and Toyota have launches coming up, what price point and is
this an issue?
Honda Brio launch is likely some time in Q1FY12. We believe Honda will
maintain its premium pricing. Hence, launch is likely in the premium A2
segment. Toyota A2 segment pricing, yet to be announced but given Etios
pricing, we believe Toyota pricing will be at a slight premium to Maruti Swift.
Etios pricing, on a comparable spec. basis is still at roughly 8%-10% premium
to Maruti Swift Dzire so not entirely disruptive. We expect Toyota to be more
meaningful competitor once they launch diesel variants. 70% of Swift Dzire
sales are for diesel variant.
Overall our forecast continues to factor in gradual market share loss for Maruti
in the passenger vehicles market.
Earnings Outlook
What is their royalty structure now?
The royalty is now between 4.5%-6.5% for domestic models and an additional
1% higher for exports. This has changed from 3%-5% earlier. Some of the old
models like M800, Omni and Gypsy don’t have any royalty. Royalty is now
fully yen denominated. Therefore royalty is likely to remain in the 5%-5.5%
range depending on the product mix and JPY:INR.
Do you think most of the earnings downgrades are
behind us?
While EBITDA margins have been weak, the co. has not really seen any
earnings downgrades post the royalty change event in Q1FY11. Strong vol.
growth has offset downside margin pressures.
Q3FY11 saw 120bps of margin impact due to higher seasonal discounts and
salary arrears. Plus the co. has taken a small price increase in Jan’11. We
therefore believe, the co. has enough buffer to manage raw material cost
increases on a sequential basis in Q4FY11.
However, longer term, if the commodity prices continue to rally further - we
may see some more margin pressure. However, that’s a risk for the whole
sector. We believe co. has a strong track record of cost reduction and will be
offset the same better than other sector peers.
We believe there has been no structural deterioration in Maruti’s margins due
to rising competition. The two key reasons that have resulted in lower
EBITDA margins for Maruti over the longer term have been: 1) Increase in
royalty expenses; 2) Sharp appreciation of the yen.
We believe the valuations are already accounting for potential margin
pressure trading at 12x FY12 earnings, at the lower end of its trading range.
Maruti Suzuki India
Maruti Udyog Limited is the largest passenger car manufacturer in India with a
market share of over 50%. The company was formed in 1983 and commenced
operations in 1984, as a joint venture between the Government of India (GOI)
and Suzuki Motor Corporation. In 2002, GOI ceded majority control to Suzuki
by not subscribing to a rights issue. GOI subsequently sold 27.5% of its stake to
investors in an IPO. Suzuki owns 54.6% of Maruti. Suzuki selected Maruti to be
its small car manufacturing hub for the European market and also as an R&D
centre.
Statement of Risk
Higher raw material costs and slowdown in demand remain the key risks to our
estimates for Maruti. Increasing competitive pressure due to entry of newer
players in its core segment could further impact margins negatively. Significant
portion of exports are to EU and imports from Japan, hence euro depreciation
and yen appreciation will negatively impact company's margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Maruti Suzuki India
Addressing investor concerns
Maruti market share has been stable
In this note, we look to address key questions received from investors on Maruti. In
9MFY11, Maruti has not lost any market share in the A2 and A3 segment which
account for 82% of its domestic volumes over FY10 despite entry of Ford, VW and
Nissan into the A2 segment. The co. has gained market share in the UV segment.
While, we expect Toyota to gain market share with Etios launch, we expect
Maruti’s market share to decline only 150bps by FY13 from current 44.7%.
Toyota Etios pricing is not disruptive
Toyota Etios pricing on a comparable basis is 8%-10% above Maruti model. We
therefore do not see any case for increasing margin concerns due to competitive
pressure for Maruti. Most players (Hyundai, Tata Motors, GM) have taken a price
hike due to cost pressures in Jan’11. We therefore see limited risk of irrational
price based competition.
Q4FY11 unlikely to see further drop in EBITDA margins
Q3FY11 saw 120bps of margin impact due to higher seasonal discounts and salary
arrears, which will reverse in Q4. Plus the co. has taken a small price increase in
Jan’11. We therefore believe the co. has enough levers to manage raw material cost
increases on a sequential basis in Q4FY11. Further, we believe valuations at
12xFY12 EPS are already factoring in potential downside to existing margins.
Valuation: Maintain Buy Rating, PT Rs 1,700
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.3%.
Competitive Scenario
Breakdown of Maruti’s product category and mkt share? And the
viable competitor in each category and their mkt share. Where is the
threat most apparent?
We believe Hyundai followed by Toyota are likely to remain the key
competitors for Maruti over the medium term. FY12 will see launches from both
these players in the A2 segment.
A2 segment (71% of Maruti and 58% of Industry
domestic vols)
This is the key segment both in terms of competitive activity and volumes. All
competitors launching in this segment as it accounts for bulk of the market. The
segment has seen launches from GM (Beat), VW (Polo), Ford (Figo) and Nissan
(Micra) - in Q4FY10 and Q1FY11. Toyota launch of Etios Liva is expected in
Apr'11. Hyundai expected to launch a new product sometime later this year at
Rs 300k price point to compete with the Maruti Alto. So A2 segment will
continue to remain in focus in terms of volume and market share for all cos.
The price point ranges from Rs 260k - 600k. We believe the segment is getting
split with Rs 260k - 400k (the low to mid segment) - the entry and premium
entry vehicles. Maruti dominates this market with Alto (biggest selling model in
India), Wagon R and Estilo. Key competitors here are Hyundai (i10, Santro) and
Tata (Indica). Ford and GM have increased their presence with new launches in
the last 1 year while Tata Motors - Indica has been continously losing market
share.
A2 premium (Price point: Rs 400k – Rs 600k) is larger hatchbacks and diesel
variants. Maruti is again dominant here with Swift and Ritz. Hyundai (i20) and
VW (Polo) are the other key players. Toyota's upcoming Etios Liva will also be
in this segment.
Overall Maruti's market share has recovered close to previous level of 60% for
the segment despite significant influx of competition during the year. We
believe this is a result of strong growth in Alto with launch of K10 variant in
Aug’10 as well as continuing strong growth in rural markets (outside Top 100
cities).
A3 segment (11% of Maruti and 14% of Industry vols)
Key players are really Maruti with its Swift Dzire and Tata Motors with its
Indigo Manza. Recently launched Toyota Etios also in this segment and is likely
to be the key new competitor. Hyundai, Ford and GM have been losing ground
in this segment. At the premium end - Key player is Honda City. New VW
Vento is also likely to successful given it has diesel option which Honda doesn't
have. Maruti SX4 at the premium end has seen limited success but this could
change with the launch of diesel SX4 expected shortly. We expect Tata Motors
to lose some ground post Toyota launch. Maruti's market share has continued to
be steady. We dont expect Maruti to lose market share given they still have 2-3
mths waiting list for Swift Dzire the key volume driver in the segment.
UV segment (12% of Maruti and 22% of Industry vols)
The segment comprises of Vans and SUV's. Maruti is really the dominant player
in Vans with Omni and Eeco (launched in Feb'10). Eeco launch has been v.
successful despite lack of diesel engine driving market share gains for Maruti.
Most of the vehicles in ex-Maruti in this category are really diesel vehicles.
SUV's segment dominated by M&M. Maruti is likely to see limited direct
competition to Maruti in this segment given low price point of Rs 200k - 300k
for its products. Tata Motors vans are really variants of Tata Ace mini truck and
used for transportation in sub-urban areas.
Honda and Toyota have launches coming up, what price point and is
this an issue?
Honda Brio launch is likely some time in Q1FY12. We believe Honda will
maintain its premium pricing. Hence, launch is likely in the premium A2
segment. Toyota A2 segment pricing, yet to be announced but given Etios
pricing, we believe Toyota pricing will be at a slight premium to Maruti Swift.
Etios pricing, on a comparable spec. basis is still at roughly 8%-10% premium
to Maruti Swift Dzire so not entirely disruptive. We expect Toyota to be more
meaningful competitor once they launch diesel variants. 70% of Swift Dzire
sales are for diesel variant.
Overall our forecast continues to factor in gradual market share loss for Maruti
in the passenger vehicles market.
Earnings Outlook
What is their royalty structure now?
The royalty is now between 4.5%-6.5% for domestic models and an additional
1% higher for exports. This has changed from 3%-5% earlier. Some of the old
models like M800, Omni and Gypsy don’t have any royalty. Royalty is now
fully yen denominated. Therefore royalty is likely to remain in the 5%-5.5%
range depending on the product mix and JPY:INR.
Do you think most of the earnings downgrades are
behind us?
While EBITDA margins have been weak, the co. has not really seen any
earnings downgrades post the royalty change event in Q1FY11. Strong vol.
growth has offset downside margin pressures.
Q3FY11 saw 120bps of margin impact due to higher seasonal discounts and
salary arrears. Plus the co. has taken a small price increase in Jan’11. We
therefore believe, the co. has enough buffer to manage raw material cost
increases on a sequential basis in Q4FY11.
However, longer term, if the commodity prices continue to rally further - we
may see some more margin pressure. However, that’s a risk for the whole
sector. We believe co. has a strong track record of cost reduction and will be
offset the same better than other sector peers.
We believe there has been no structural deterioration in Maruti’s margins due
to rising competition. The two key reasons that have resulted in lower
EBITDA margins for Maruti over the longer term have been: 1) Increase in
royalty expenses; 2) Sharp appreciation of the yen.
We believe the valuations are already accounting for potential margin
pressure trading at 12x FY12 earnings, at the lower end of its trading range.
Maruti Suzuki India
Maruti Udyog Limited is the largest passenger car manufacturer in India with a
market share of over 50%. The company was formed in 1983 and commenced
operations in 1984, as a joint venture between the Government of India (GOI)
and Suzuki Motor Corporation. In 2002, GOI ceded majority control to Suzuki
by not subscribing to a rights issue. GOI subsequently sold 27.5% of its stake to
investors in an IPO. Suzuki owns 54.6% of Maruti. Suzuki selected Maruti to be
its small car manufacturing hub for the European market and also as an R&D
centre.
Statement of Risk
Higher raw material costs and slowdown in demand remain the key risks to our
estimates for Maruti. Increasing competitive pressure due to entry of newer
players in its core segment could further impact margins negatively. Significant
portion of exports are to EU and imports from Japan, hence euro depreciation
and yen appreciation will negatively impact company's margins.
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