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MOSL: MARUTI SUZUKI (Buy)-Annual Report Update-FY20 – an unpredictable year, but expect normalcy in FY21

Maruti Suzuki | Annual Report Update: FY20 – an unpredictable year, but expect normalcy in FY21; EV launch in 2020 | CNG & hybrids to compensate for diesel discontinuance

(MSIL IN, Mkt Cap USD24.6b, CMP INR5779, TP INR6950, 20% Upside, Buy)

 

Our analysis of MSIL FY19 annual report revealed the company’s take on (a) the current demand environment and outlook, (b) its Toyota alliance, (c) its strategy on EVs and other alternate fuels, and (d) plans for cost reduction. Key insights highlighted below:

• FY20 is expected to be an unpredictable year due to three major regulations - the mandatory ABS, second phase of safety regulations and BS6 implementation.
• Company sees normalcy returning in FY21 with expectations of MSIL garnering its usual growth rate. It continues to build sales and service infrastructure (particularly in rural areas), as well as production capacity for the future.
• MSIL is getting access to Toyota's technology for electric vehicles (EVs) and higher performance hybrid vehicles. The combination of Suzuki and Toyota's global volumes should provide significant scale, making technology more affordable, especially for a price-sensitive market like India.
• MSIL has already started supplying cars to Toyota India and selling through the latter's network, a move that is bringing in additional volumes for MSIL. This arrangement should bring in incremental volumes and help maximize volume per model/platform. Also, MSIL will benefit from the production capacity of Toyota India in the future.
• Company plans to discontinue the 1.3 liter diesel engine due to very high cost inflation for BS6 compliance. It recently introduced a new 1.5 liter diesel engine, which is upgradeable to BS6.
• MSIL expects the increased sale of petrol and CNG vehicles to more than compensate for the discontinuance of diesel vehicles.
• Besides working on an EV for launch in 2020, it is also working at more practical solutions to promote clean fuels like CNG and hybrids. It expects 50% growth in CNG vehicles in FY20 (on back of 40% growth in FY19).
• FY19 was first year of earnings decline (~7% decline) post FY12. While revenues grew 8%, EBIT declined ~19% due to 300bp EBIT margin erosion (to ~9%). RoCE was healthy at 22.1% (-520bp YoY), despite 75% of capital employed being in cash (~INR353b of net cash). It invested ~INR47b in capex, translating into FCF of ~INR18.9b.