MOSL: MARUTI SUZUKI | FY17 Annual Report Update (Buy)-Several initiatives to further deepen, build moats-Hybrids as a step towards full EV

​Maruti Suzuki | FY17 Annual Report Update: Several initiatives to further deepen, build moats; Hybrids as a step towards full EV, supported by Suzuki’s Li-ion battery JV

(MSIL IN, Mkt Cap USD36.3b, CMP INR7702, TP INR8819, 15% Upside, Buy)

MSILs FY17 annual report gives insights on MSILs approach to Electric Vehicle (EV) and strategic investments in land, apart from update on other strategic initiatives. Also, MSIL has further increased disclosures on Sustainability, which highlights its holistic approach to business. Insights from FY17 annual report instills confidence in longevity of growth for MSIL, as it deepens it existing moats and create new ones by a) further strengthening distribution network, b) increase dealer viability through strategic investments in land for dealerships, c) building loyalty as well as control residual value of MSIL used cars through higher focus on True Value network and d) increase local capabilities in R&D. MSIL has increased its dividend payout policy, with upper limit for the payout at 40%, higher than 30% earlier. Key highlights from MSIL’s FY17 annual report:

• Hybrid vehicles – stepping stone toward electric vehicles: MSIL will introduce EVs as soon as it sees signs of readiness at the customer end. In interim, it is focusing on hybrid technology, and sees it as a step toward electric mobility. Li-ion battery plant, which is being set-up by JV between Suzuki, Toshiba and Denso, would help to reduce cost of hybrids and EVs. Also, global alliance with Toyota would also address future technologies issues.
• Strategic investments in land – creating another moat: It has initiated strategic investments in land at prominent and upcoming locations for expansion of sales and service outlets (to improve viability of new & existing dealership). In FY17, 77 land parcels were identified, which are at various stages of the commercial and regulatory approval process. In FY18, it is targeting to acquire 400-500 sites.
• Distribution – further strengthening its network: Based on MSIL’s assessment, it would require at least 3,500 sales outlets (from ~2,300 as of Mar-17) and ~5,000 workshops (from ~3,300) over the next few years. Along with network expansion, MSIL is focusing on upgrading the quality of network through better infrastructure and superior customer experience.