Company might have to do the heavy-lifting in deal, outweighing technology gains; downgraded to ‘Sell’, with TP cut to Rs 7,700
Success in India’s ever-growing passenger vehicle (PV) market remains elusive for global giants like Toyota, VW, Ford (together at ~8% market share after decades of presence). The Korean giant Hyundai’s success (~17% market share) is still an exception and its presence is set to be boosted with entry of Kia Motors in 2019. Signs are clear that global OEMs want a bigger pie of this market; we take a closer look at Toyota & Suzuki’s recent moves from Japanese lens.
*Emerging three power centres amongst Japanese OEMs: (i) Nissan Motor Co: The 19-year old Renault-Nissan alliance has led the way, achieving considerable success, bolstered by the recent addition of Mitsubishi into its fold; (ii) Honda Motor Co: It has taken the path of joining forces with specialised partners to be future-ready (associations with Waymo for autonomous driving, and with Hitachi Automotive for electrified drivetrains);
(iii) Toyota: Historically not very successful in managing associations, Toyota has gone ahead with tie-ups with players like Suzuki and Mazda, albeit in differing ways even as it already has Daihatsu, Hino in its fold.
*Suzuki and Toyota desire a win-win association; a huge test of India commitment: As per the joint announcements by Suzuki and Toyota, Suzuki is expected to gain: (i) access to Toyota’s electric vehicle (EV) technology, and (ii) licence to sell Corolla in India. In return, Toyota will benefit from: (i) Suzuki’s low-cost manufacturing in India as it will supply it with electric vehicles; and (ii) licence to sell Baleno and Brezza in India. The joint statements definitely resonate the desire to succeed in this arrangement, but we cannot help perceive that Maruti Suzuki India (MSIL) might have to do heavy lifting to fulfill Suzuki’s end of the bargain.
*Looking closer into distribution strength argument vis-à-vis Toyota: The street believes that MSIL’s vast overall distribution network (~2,100 dealers) insulates it from any significant volume loss in its sales channel vis-à-vis Toyota Kirloskar (~275 dealers). We tried mapping the dealership data on a state and city wise basis for both Toyota Kirloskar and NEXA (as MSIL’s Baleno is sold only via NEXA), and found a significant locational overlap (>80%) between the two channels. Also, combining this with the sales throughput/per dealer data of Toyota and MSIL, it becomes evident that Toyota dealerships remain on a strong footing in terms of volumes and could scale up further if MSIL supplies adequate volumes to them.
*Visible risks outweigh potential technology gain; cut peak multiples: Baleno and Brezza have been a huge success for MSIL. We believe the scales are currently tilted toward the risk of loss of market share and dominance vis-à-vis future benefits of EV technology. We thus cut our multiple to 22x FY20e EPS (earlier 24x). We downgrade the stock to Sell from Hold with a target price of Rs 7,700/share.