Today, MSIL has a virtual monopoly in passenger vehicle market in India led by strong dealership network, brand loyalty on the back of competitive prices and resale value. With a slew of new launches including refreshers, product rejig toward premium products and leadership position in Indian market coupled with reasonable valuations, the stock will continue to enjoy the fancy of investors.
Nitin AgrawalMoneycontrol Research
Factors such as delayed festive season, floods in Kerala and increasing cost of total ownership on the back to rising interest rates, fuel prices and insurance cost dampened demand for passenger vehicles. They also impacted the performance of Maruti Suzuki India (MSIL), the country’s top car maker with a market share of close to 57 percent in passenger vehicle segment. The company posted a meagre growth in its topline and realization and witnessed operating margin contraction in an environment of rising raw material (RM) prices.
Today, MSIL has a virtual monopoly in passenger vehicle market in India led by a strong dealership network, brand loyalty on the back of competitive prices and resale value. With a slew of new launches including refreshers, product rejig toward premium products and leadership position in the Indian market coupled with reasonable valuations, the stock will continue to enjoy the fancy of investors.
Quarter in a nutshell
Decline in volume; marginal ASP growth
MSIL posted a decline of 1.5 percent on year-on-year (YoY) basis in its volume, primarily, due to subdued demand on the back of rising fuel cost, mandatory long-term insurance, rising interest rate and floods in Kerala.
Average selling price (ASP), however, witnessed an improvement of 4.6 percent on YoY basis on the back of rich product mix. This led to 3.1 percent YoY growth in its net revenue from operations.
EBITDA margin contraction – negative operating leverage
MSIL posted a YoY decline of 6.7 percent growth in earnings before interest, tax, depreciation and amortization (EBITDA) on the back of decline in volume growth. EBITDA margin witnessed a contraction of 159.4 bps (YoY), mainly due to negative operating leverage and adverse foreign exchange.
The moot question is whether the business is good to own for the long-haul?
Recent macroeconomic factors such as rupee depreciation, rise in oil prices, and rising interest rates have played spoilsport in terms of demand. However, we believe, that this will not continue forever. Additionally, strong demand is expected to come from the rural market on the back of government’s focus toward rural areas ahead of election and increase in minimum support price (MSP).
Further, the demand in urban markets is also expected to continue to be very strong on the back of higher disposable income and very low penetration of cars in India.
The company imports many electronics parts from abroad that hurt its margin in the scenario of rupee depreciation. And, recent rupee depreciation has made the company to pursue localisation aggressively now. The management mentioned that there are technology challenges in pursuing that but they are working in that direction.
Strong product portfolio and inclusion of premium products
MSIL has planned a slew of launches over the next three years. Its new Swift and Swift Dzire are doing phenomenally well. In fact, the company sold 3 lakh units of the new Swift within 6 months of its launch – fastest in the industry. Newly launched Ciaz is also getting strong traction. The company is expected to launch many new products, going forward.
Over the years, MSIL has successfully reoriented its product portfolio dominated by small cars to premium products, which cater to the changing customer preference. This has helped the company in commanding pricing power from its customers.
Strong distribution network – a moat
MSIL’s leadership is indicated by its strong distribution network. This distribution network is a moat for the company, which gives it a competitive advantage in an otherwise highly competitive industry. Moreover, in the strong quest to cater to the premium segment, the company is expanding its Nexa network. It currently has around 250-300 Nexa outlets and plans to expand it to 400 by 2020.
Getting ready for EV
In order to move towards cleaner energy, MSIL has also started gearing itself for the next big disruption of Electric Vehicle (EV) in the automobile space. It has started to invest in setting up a Li-ion manufacturing unit in India. As per the company’s management, the indigenous development of the battery could bring the prices of EVs down substantially. It has also created a prototype of an EV vehicle to test it on Indian roads.
To cater to strong demand outlook, MSIL has chalked out a capacity expansion plan. Gujarat plant’s phase I has already started production and is expected to produce 250,000 units this year and second phase would start from January 2019. The management expects to expand the capacity of this plant to 1.5 million.
Valuation at very reasonable levels
In light of subdued demand and outlook, stock has corrected quite significantly and down 33 percent from 52-week high making the valuation very reasonable for a strong franchise like MSIL. It currently trades at 23.7 times FY19 and 21.1 times FY20 projected earnings.
Moneycontrol Research Page.