Company Overview:

MSIL needs no introduction as every Indian associates idea of an affordable and reliable car with Maruti. MSIL is involved mainly in the business of Passenger Vehicles (PV). It also derives its revenues from sale of spare parts and services but 85-90% of the revenue comes from PV sales.

MSIL is and has been the dominant brand in the PV segment in India for a long time. It has consistently improved its market share over the years. It had 44% market share in PV segment in FY14 which has risen to 53% today. So essentially more than half the passenger vehicles sold today have a Maruti Suzuki brand behind them. In this segment, it has around 60% market share in Compact Sedan Passenger Vehicle and 70% market share in Mini Segment in India.

One of the key reason MSIL has been able to capture such huge portion of the market is its distribution network. It has 2500+ Arenas with a target to reach 4000+ and more than 350 Nexa showrooms spread throughout the country. This has helped MSIL achieve great rural penetration and now Rural sales contribute to 38% of its total revenue.

MSIL has a tag of selling cheap vehicles and so the company forayed into Nexa distribution channel to sell premium vehicles. This strategy has proven successful as premium vehicles now contribute ~35% of total revenue compared to just ~6% in FY14. Consequently, average selling price/vehicle rose from Rs.3.5 lakh in FY14 to more than Rs.4.6 lakh in FY19, although that has reduced in recent quarters.

MSIL has close to 98% capacity utilization while all its competitors (except Hyundai) are at 50-60% capacity utilization. MSIL is virtually debt free whereas its listed competitors have debt to equity ratio of greater than 1. MSIL also has the best ROE and ROCE among its peers.

The company has formed an alliance with Toyota to manufacture PVs under Toyota brand. In return, MSIL gets access to Toyota’s EV technology. This shows company’s foresight and willingness to embrace the future trends.

Maruti Suzuki has decided to stop sale of diesel vehicles from 1stApril 2020. Diesel formed 47% of total volume in FY13, which dropped to just 20% in FY19. This has affected sales in recent times. Coupled with it, BS-Vl implementation, mandatory Third party insurance issues and NBFC crisis brought huge setbacks to auto industry. Sales growth has been slow for MSIL in past few years and no. of units sold dropped 18% YoY in FY20. MSIL gave average discount of Rs.33000 per vehicle in Q3 which was highest discount given by the company ever. This reflects the demand woes in the industry.

Entire auto industry has been going through a slowdown and no major help has been received from the Government even though Autos form 49% of total manufacturing GDP in India.

Risks:

  1. Technology change is a big challenge for the industry as new technologies require huge capex and severely increase costs.
  2. Intense competition is a major hurdle for MSIL. Many new entrants have entered the Indian market in the last 2-3 years with huge investments. They have launched excellent products at competitive prices. These players have the potential to take MSIL’s market share.
  3. Slow demand growth in auto industry due to developments like shared mobility can also affect earnings growth in the long term.

Final Thoughts:

Economic slowdown has affected the growth prospects of the company, but the company has an unusually strong balance sheet, with $5.4 billion of net cash which is ~4x EBITDA. Post the Covid crisis and demand slowdown issues, MSIL could emerge as a victor as a lot of its peers are in no position for new market expansion. Also, PE levels of MSIL are at a historic low, creating opportunity for investors ready to bet