[show_to accesslevel=’almanack’] We explore the business of India’s leading passenger vehicle company and assess the opportunities and challenges it faces.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but my analysis can be biased, and wrong. I have been wrong many times in the past. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).
About Maruti Suzuki India Ltd. (MSIL)
MSIL is India’s largest seller of passenger vehicles (cars) and is a 56.2%-owned subsidiary of the Japanese car and motorcycle manufacturer Suzuki Motor Corporation. At the end of March 2018, the company owned 50% of the Indian passenger vehicles market and sold more than 1.5 million units for the first time in its 30 years history. The company manufactures and sells popular cars such as the Ciaz, Ertiga, Nexa, Wagon R, Alto, Swift, Celerio, Swift Dzire, Baleno, Omni, Alto 800, SX4, Eeco, and Ignis.
MSIL has three manufacturing facilities in India, with a combined production capacity of 1,700,000 vehicles annually. The company sells its cars through more than 2,300 sales outlets (aims to more than double this to 4,000 by 2020). Apart from this, it has more than 3,300 service stations across 1,500 cities throughout India. In fact, MSIL’s dealership network is larger than that of Hyundai, Mahindra, Honda, Tata, Toyota and Ford combined. Service is a major revenue generator of the company. Most of the service stations are managed on franchise basis, where MSIL trains the local staff. Other automobile companies have not been able to match this benchmark set by the company, which causes it to stand miles apart from its competitors.
Let’s now analyze MSIL using a set of questions to test the underlying business and management quality.
1. Has the company done well in terms of sales and profit growth over the past few years?
MSIL has grown its sales and PBT at 14% and 37% respectively over the past five years. This growth has been led by a combination of volume growth and better pricing owing to launch of premium products. Superior growth in the utility vehicles (UV; Vitara Brezza and Ertiga) segment has also aided sales growth in recent years. This segment, which formed around 14% of MSIL’s total domestic sales in FY17 more than doubled in sales volumes in the past year, and at 28% during the latest published quarter (3QFY18). Brezza, for instance, is currently having a waiting period of over 20 weeks, which suggests continued growth momentum in the UV segment. Growth in the compact segment is also expected to remain strong driven by Baleno and new Dzire. MSIL’s mini car segment is expected to see lower growth due to higher competition in the segment.
Apart from increasing its share in large urban centers, MSIL continues to grow robustly in small town India too. The reason is not far to fetch. Four wheelers command high aspirational value in smaller cities. Apart from this, consumers consider affordability, cost of servicing and resale value as major factors in their purchase decisions. MSIL provides them all these benefits, thanks to economies of scale led by its large service network and wide and easy availability of spare parts. A larger population of MSIL vehicles on road also helps in pushing up resale values higher than competition. In most small cities, MSIL becomes the first choice by default due to the above reasons.
MSIL’s Volume Sales Segregation
2. How profitably have retained earnings been reinvested?
MSIL’s average ROCE over the past five years has been around 37% (10-year average of 27%). What is more, ROCE has inched up over the years, from around 10% in FY12 to 71% in FY17.
Improved realizations on the back of rising share of premium vehicles has helped the company gain so well on its return on investments.
3. Does the business have a durable competitive advantage?
There are multiple competitive advantages that MSIL has built over the years that no other car company in India has come close to replicate. Its largest dealership and sales & service network is one of the key ones, which have helped the company gradually ramp up its market leadership over the years.
The proof is in the numbers, with all its financial parameters (sales and profit growth, profit margins, return ratios) improving substantially over the last few years. Rising market share in the overall passenger vehicles industry in India, and especially in the premium products segment have also helped MSIL improve its positioning considerably.
4. What are the risks to the business?
Execution remains the key risk for MSIL, given the immense popularity of its cars, especially the newly launched models. There is already a long waiting period for some MSIL’s models due to capacity constraints at its existing plants, and therefore timely execution on production ramp-up is crucial for the company.
Another risk is that if currency i.e., Yen appreciation. MSIL pays Yen denominated royalty of around 5.3% of sales to parent Suzuki Corp (3QFY18 data). The company also sources some components from Japan which constitute around 15% of sales. In case of Yen appreciation, these costs will go up in rupee terms, which may put pressure on the company’s operating margins.
As per the management, MSIL is trying to bring down its Yen-denominated exposure, and even royalty rates on jointly-developed new models such as Vitara Brezza. New royalty rates are likely to be lower than the current structure as India’s R&D division has also started contributing to vehicle development. Maruti has put in place a new R&D facility at Rohtak in Haryana. It plans to invest a total of Rs 4,000 crore at the R&D facility.
MSIL’s stock is currently trading at around Rs 9,040 (as on 20th April 2018), which implies a P/E multiple of around 45 times its trailing twelve months EPS.
Given its market leadership, quality products and pipeline, large sales & service network, and cost advantage due to volumes, MSIL is the well placed to ride increasing penetration of four wheeled passenger vehicles in India. However, you must carefully assess the opportunities and risk in the business and ensure sufficient margin of safety before taking an investment decision.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but my analysis can be biased, and wrong. I have been wrong many times in the past. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578)[/show_to] [hide_from accesslevel=’almanack’]
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