MOSL: MARUTI SUZUKI (Buy): See through the noise; Negligible impact of higher fuel prices
Maruti Suzuki: See through the noise; Negligible impact of higher fuel prices; RM inflation mitigated by price hike
(MSIL IN, Mkt Cap USD39.8b, CMP INR8993, TP INR10525, 18% Upside, Buy)
Maruti Suzuki’s (MSIL) stock has underperformed the broader markets (by ~8% v/s BSE Sensex) due to concerns about (a) fuel price inflation, (b) JPY appreciation and (c) slower-than-expected progress so far in parent Suzuki’s alliance with Toyota. The stock underperformance was despite stronger-than-estimated volume growth at ~15% in CY18YTD. In this note, we attempt to address investor concerns about (a) demand impact due to higher fuel prices, (b) cost inflation impact on margins and (c) levers to margins expansion. Key highlights of our assessment:
- Domestic PV industry weathered fuel inflation well in previous cycles: Historically, domestic PV demand has moderated only for a limited period of 3-6 months during the fuel price inflationary periods. Interestingly, in the previous two such inflationary periods, petrol prices increased 36% and 44%, respectively (refer Exhibits 1, 2), but demand was resilient. While it might be early to gauge the impact of recent fuel price inflation, our interaction with dealers suggests that there has been no impact of higher fuel prices on demand as yet.
- Alternative fuel portfolio to benefit from higher fuel prices: MSIL has a widest portfolio of CNG vehicles (six v/s three each for Hyundai and TTMT PV), which might be preferred by customers over petrol/diesel variants in a higher fuel price environment. These alternative fuel variants also enjoy better pricing (higher by 8-20%) and are generally not sold under any discount schemes.
- RM inflation impact managed by cost-cutting initiatives and price hikes: Based on the current key commodity prices, we estimate a further impact of ~130bp in 1HFY19 (after ~150bp increase in FY18). MSIL is focused on absorbing cost inflation via internal cost-control measures; price increase is the last resort. It raised prices by up to 2% in June-18 to partly offset the impact of cost inflation.
Maruti Suzuki India is engaged in manufacturing, purchasing, and selling motor vehicles, components, and spare parts in India, Europe, Africa, Asia, Oceania, and Latin America. Co. offers 14 brands and approximately 150 variants of passenger cars, multi utility vehicles, and multi-purpose vehicles under the Alto 800, Alto K10, Wagon R, Celerio, StingRay, Ritz, Swift, DZire, SX4, Ertiga, Omni, Eeco, Gypsy, and Grand Vitara brands. Co. is involved in the facilitation of pre-owned car sales, fleet management, and car financing. In addition, it provides motor insurance products, accessories, auto card, and driving school services.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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