Hyundai Eon launch to seriously threat MSIL’s stronghold – Alto ::LKP

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Hyundai Eon launch to seriously threat MSIL’s stronghold – Alto

Hyundai’s recent launch of Eon has marked its presence into the entry
level car segment where MSIL is having a dominant position through its
highest selling car Alto. The base version of Eon would be sold at an
attractive price of Rs.2,70,000, while the top end will be sold close
to Rs.3,71,000. While placed at an attractive price point, the model
has several better features as compared to Alto, like better space -
interior as well as boot space, higher mileage and better looks and
costing just Rs.30,000-35,000 more than any comparable version of
Alto. Eon’s higher versions will be having central locking, in built
audio system and air bags for the first time in any entry level car,
and costing well below Rs.4 lakhs.

MSIL has always been holding a market leadership position in this
segment with MS of ~80% and contributing 30% to MSIL’s total volumes.
Hyundai has a target of selling 1.5 lakh units p.a. from this new
launch. This could easily take away market share of more than 500-600
bps from MSIL in this segment which has never happened in the past.
With Eon scoring better on each and every parameter against Alto, we
believe the probability of Hyundai denting MSIL’s market share in the
entry level segment is very high. Earlier, this segment faced benign
competition as Tata Nano failed and was unable to dent MSIL from its
market leadership position.

Manesar labour issues persist, production seriously impacted

Labour issues at Maruti do not seem to get resolved. There has been no
production from Manesar plant for more than a week now and union
problems are getting intensified day by day. Since the labour problems
erupted in June, MSIL’s volumes are sinking. Though infusion of new
employees had somewhat taken care of the production in September,
October seem to produce absolutely minimum levels of production from
its Manesar plant. With ongoing festivities, MSIL is unable to cater
to the demand, mainly for the new Swift which has an order book of
100,000 units which may get delayed. The company has already stopped
accepting any more bookings as the waiting period of Swift has gone up
to 10 months. This may also result in some cancellations of the orders
if the strike continues for a significant amount of time. We have
factored in 8.8% volume decline in FY12E, slightly better than the
10.6% YTD decline, while forecasting 9% growth in FY13E. Management
expects flattish growth this year, which we believe is unlikely. SIAM
has cut the car industry growth forecast to 2-4% for FY12.

Margins to get impacted on higher discounts, yen appreciation & competition

Higher discounts, rising competition and yen appreciation will
adversely impact margins in FY12. In FY12, we expect EBITDA margins to
fall 40 bps to 9.7%, while with demand expected to bounce back in FY13
and yen appreciation getting countered by cooling commodity prices and
economies of scale post capacity expansion, we have factored in
improvement in margins to 10.4%.

Outlook and valuation

In line with our negative outlook on the stock on the concerns stated
above, we further downgrade our earnings estimates on MSIL by 15% each
for FY12E and FY13E, thus cutting our target price to Rs.930,
maintaining Underperformer rating on the stock.