Maintain ‘buy’ on Maruti, SUV remains the focus area

Maruti (MSIL) eyes ~12.7% volume CAGR in passenger vehicles (PV) in Asia (excluding Japan) over CY20-25. Suzuki Motor Corporation has shared its mid-term management plan for the next five years (Apr’21 to Mar’26). It places greater emphasis on quality as the shift to electrification and software development are yet to take place.

It would prioritise three issues: CO2 emissions in use, CO2 emissions from production, and quality assurance. The key highlights are: Suzuki has renewed its focus on electric vehicles (EVs) with an estimated timeline of CY25. This seems to be slightly later than the plans of most of MSIL’s competitors, though it may not be late if the inflexion point for electric Cars is back-ended. It is focused on maintaining its market share of over 50% in India.

On the product front, the focus is on strengthening its presence in the SUV segment as well as promoting CNG cars. While it talks about deepening its alliance with Toyota, there are no details beyond the broader areas of EVs, the African market, and supplementing products and components. Develop EVs by CY25 and reduce emissions.

The India business: Suzuki will take the initiative in promoting electrification in India in response to environmental issues, and maintain a market share of over 50% in the passenger car segment. The company expects recovery from the Covid-19 pandemic and growth in the Indian market.

Strong demand and stable competitive positioning would drive the convergence of P/E towards its five-year average of ~30x. The stock trades at 25.7x/20.8x FY22E/FY23E consolidated EPS. We value the stock at 27x Mar’23E consolidated EPS (at a 10% discount to its five-year average P/E v/s 25x earlier) to factor in strong demand and stable market share. Maintain ‘buy’.

It will proactively promote the development of various carbon neutrality technologies. It is targeting ‘zero’ CO2 emissions from production by CY50. Suzuki is targeting ~12.7% CAGR in PV volumes in Asia (excluding Japan) over CY20-25. This growth would be primarily driven by India and is broadly in line with our estimate and on a low base of CY20. It will focus on creating higher quality, value-packed products at affordable prices. It will also focus on prevention, early detection, and outflow of quality problems by promptly investigating the causes and taking countermeasures, producing products with reduced variants, and expanded traceability management.

The India business: Suzuki will take the initiative in promoting electrification in India in response to environmental issues, and maintain a market share of over 50% in the Passenger Car segment. The alliance with Toyota will be deepened for co-operation in electrified vehicles, the African market, and will supplement products and components. The company expects recovery from the Covid-19 pandemic and growth in the Indian market.

It aims at record consolidated net sales of JPY4.8t. The operating income target is set at 5.5%, below its previous target of 7%, due to aggressive investments (JPY1t or ~$9.4b) on research and development, such as electrification, over five years. It will invest an additional JPY1.4t (~$13.2b). The dividend payout ratio is targeted at 30%. This implies an increase of ~30% in its annual R&D budget, whereas capex stands at similar levels.

While the demand environment is strong, cost absorption would be gradual, keeping margin in check for FY22E. We expect a gradual recovery in the margin as the cost is absorbed over the next 2-3 quarters. MSIL is best positioned in a fuel inflationary environment, given its strong positioning in small Cars and robust CNG portfolio.

Strong demand and stable competitive positioning would drive the convergence of P/E towards its five-year average of ~30x. The stock trades at 25.7x/20.8x FY22E/FY23E consolidated EPS. We value the stock at 27x Mar’23E consolidated EPS (at a 10% discount to its five-year average P/E v/s 25x earlier) to factor in strong demand and stable market share. Maintain ‘buy’.