Maruti Suzuki : Silver Linings in a Cloudy Outlook : Morgan Stanley

Our deep dive into the upcoming model cycle and
dealer mapping across OEMs in potentially higher
growth states raises our confidence on MSIL’s
outlook. Furthermore, taking into account the
strong performance of TTMT, we now move MSIL
above TTMT in our OW pecking order.
India’s passenger vehicle market has been flat from
FY11-14e; this is one of the deepest down cycles in the
past 20 years and we see no signs of a turnaround. In
such an environment model cycles and dealership
networks are the silver spots for OEMs amidst a cloudy
macro outlook. Based on our analysis we note:
a) The pan-India car recovery outlook remains bleak, but
as we dive deeper we identify states that have higher
GDP growth and low car penetration; this subset will
drive future growth and MSIL has a substantial
dealership network lead compared to the competition in
these states and thus should gain market share.
b) Our Alpha Wise dealer survey points to retail demand
remaining weak and the new model cycle is one of the
key volume drivers. At last week’s Tokyo Auto Show,
Suzuki highlighted 14 planned launches for MSIL over
the next five years and we believe these include entry
into new high margin segments such as SUVs and LCVs,
which will support volume and earnings growth.
Reiterate OW: We raise our price target as we expect
multiples to expand as new model cycle details emerge
at the 2014 Delhi Auto Expo, and reiterate OW on MSIL.

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Key Thesis
Demand Recovery Remains Elusive, Focus on New
Models and Dealership Strength: Car demand recovery
visibility is low, thus to pick winners for 2014 we do a deep
dive into the upcoming model cycle across OEMs and
indentify potentially higher growth states in India. MSIL stands
tall on both these parameters thus we expect the company to
outperform the market over the coming year.
Key highlights from the note:
 Deepest car down cycle, downside risks capped:
Looking at the past 20 years’ data, we note that the Indian
car market is in its deepest down cycle, but we expect a
slow rebound in FY15 followed by recovery in FY16.
 Mapping dealer networks to growth potential, we
note that MSIL is well placed in growing states: At the
outset, the demand picture looks bleak but even in a
downcycle there are few states in India where GDP per
capita growth is high and car penetration is low (referred
to as PGDs – Potential Growth Drivers). These states will
drive growth in the next few years and our proprietary
AlphaWise dealership data show that MSIL is well placed
in this growing segment.
 Model Cycles to be Paramount: Our AlphaWise dealer
survey point to retail demand remaining weak and the
new model cycle is one of the key growth drivers for
volumes. MSIL is the strongest on new model momentum,
in our view, and over the next two years MSIL is set to
enter new segments such as SUVs and LCVs. Both are
margin accretive segments and will support margin
expansion.
 FY16 Earnings can have upside risks as Discounts
come down: Discounts will offset almost 38% of MSIL’s
FY14 EBITDA. Looking into the US car market we note
that every upcycle does lead to discount reductions and
assuming the same trend holds for India then we could
see strong upside to earnings stemming from discount
reduction
 Valuations: MSIL trades at 14x FY15e versus a 10-year
median of 14.5x. The cycle is at an historical low, thus
earnings are suppressed, so multiples should expand as
the street gains confidence on MSIL’s FY14/15 earnings
rebound. We believe the upcoming Delhi Auto Expo will
give insights into MSIL’s model cycle, which should lead
to a re-rating of the stock. At our price target the stock
would trade at 16.4x FY15e, a 15% premium to the past