Weak launch pipeline for competitors in next two years likely to work in company’s favour; FY18e EPS down 3% even as TP is revised to Rs 10,000 from Rs 10,500.
Over FY2014-18, growth in the domestic passenger vehicle industry was driven by new models while volumes for older models declined over this period. Maruti benefitted from success of its premium model launches leading to significant market share gains. Model launch pipeline is weak for competitors for FY2019-20 due to implementation of BS-VI norms from April 1, 2020; we expect Maruti to reap benefits of recent launches and waiting period on its models. Maintain Add. New models are key to volume growth for PV industry; MSIL
Maruti’s domestic volumes have grown at 12% CAGR over FY2014-18e. We note that new model launches (launched in FY2014 or beyond) have contributed almost 10% to the company’s volume growth while older models (launched prior to FY2014) have grown at only 1.7% CAGR over the same period. Baleno, Brezza, Celerio and Ciaz models have been major contributors to the company’s volume growth over the past four years. These models accounted for 33% of Maruti’s overall domestic volumes in FY2018e. We have seen similar trend for other OEMs as well; domestic volumes for other OEMs (excluding Maruti) have grown at 3% CAGR over FY2014-18e while sales of older models declined by 6% CAGR over this period. New models such as Honda WRV, Hyundai Creta, Renault Kwid and Tata Tiago have been particularly successful over this period.
Model launch pipeline is weak for competitors; MSIL to reap benefits of recent launches
Due to proposed implementation of BS-VI emission norms from April 1, 2020, most of the OEMs (only M&M will have new launches in FY2019) are not very keen on launching any major new model over FY2019-20 as it will be difficult to amortise the cost of localisation of a BS-IV model in less than two years. Therefore, new model launch pipeline for passenger vehicles in India is extremely weak over the next two years. Despite lack of major new launches, Maruti is well-placed to benefit from (i) two to three months waiting period for its recently launched models (Baleno and Brezza), (ii) strong demand and waiting period for new D’zire and Swift models, which were launched in FY2018 and (iii) potential pick-up in rural demand leading to some growth in demand for entry-segment vehicles.
Overall, we expect the company to deliver 11% volume CAGR over FY2018-20e.
Earnings estimates fine-tuned
We have lowered our FY2018e EPS estimates by 3% due to (i) 1.2% cut in volume assumptions and lower other income estimates. Our FY2019-20e EPS estimates are largely unchanged. Target price revised to `10,000 (from `10,500), based on 25X FY2020 core EPS (27X earlier) and cash & cash equivalents of `1,200/share.
—Kotak Institutional Equities