Suzuki (7269): FY16 Outlook - Gaining Strength in India
Key Points
- In 2014, Suzuki shares benefited from high market expectations following the election of the new Modi government in India; after years of lacklustre sales, the Indian auto market was set for a turnaround. However, several setbacks and concerns over India in 2015 and early 2016 led to doubts over the Indian ‘bet’; plus, Suzuki’s domestic sales performance went from bad to worse, following the tax hike for mini vehicles.
- In our view, there are now fresh indicators for the strength of the Indian auto market: a new sales tax, imposed in March, did not weaken demand, as previously feared; nor did a diesel ban in major cities. Suzuki’s subsidiary, Maruti, is particularly well positioned to benefit from various new growth drivers such as lower interest rates (Maruti has a well-established auto financing division), increasing interest in compact crossovers (Maruti has new models in this segment), and stronger growth in non-urban areas (extensive sales and distribution network). Suzuki should benefit from its positioning in India, gaining from higher volumes and an improved model mix.
- As for Japan, Suzuki is trying to reduce its dependence on the mini market by launching more passenger car models; with success, as its FYTD performance in this segment shows, with sales up 78.7% YoY. While a quick recovery for the mini market is not likely, in our view, we should see sales bottoming out on a low base of comparison. With regard to Suzuki’s admission about its improper emission testing methods in Japan, we think that it was indeed a matter of negligence rather than of intended data manipulation, given that Suzuki’s own test results showed worse ratings than would have been the case using the official correct testing method. We do not expect to see a significant negative impact on sales following this disclosure.
- One of the main risks for Suzuki lies in a further depreciation of the Indian Rupee against the Yen; however, we think that the current exchange rate level is already reflected in the share price.
- Suzuki’s valuation is attractive, in our view, trading on an FY16E EV/OP of 7.1x and on FY17E of 6.3x. Moreover, Suzuki’s market capitalisation of ¥1,366bil is smaller than its subsidiary Maruti’s market capitalisation of ¥2,011bil, indicating that there is latent value in the parent house.
Suzuki Motor is engaged in the manufacture and sale of automobiles and motorcycles in Japan and overseas. Co.'s business segments are automobiles, motorcycles, and marine. Automobiles segment manufactures and sells light automobiles, compact automobiles and general automobiles including "Swift," "Solio," "Jimny," "Spacia," and "Hustler." Motorcycles segment manufactures and sells compact two-wheel vehicles, light two-wheel vehicles, motorized bicycles and buggies such as "Hayabusa," "GSX-R1000R ABS," and "Skywave." Specialized Machinery segment manufactures and sells outboard motors, engines for snow vehicles, motorized wheelchairs, among others.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
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