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  1. Maruti Suzuki rivals face difficult future

Maruti Suzuki rivals face difficult future

The most compelling competitive strength of Maruti is its extensive portfolio of products

By: | Published: September 12, 2016 6:10 AM
The most compelling competitive strength of Maruti is its extensive portfolio of products The most compelling competitive strength of Maruti is its extensive portfolio of products

The competition needs to expand its product portfolio to compete effectively with Maruti, which is a tall order in the near term. In the meantime, foreign OEMs will likely continue to focus on exports, thereby providing viability to their India operations. Maruti’s long-term outlook remains positive and yen impact has moderated; raise target price to Rs 5,500 (from Rs 4,700).

Maruti’s competitive strength in the Indian car market cannot be overstated, in our view. The company now has 46% share of the passenger vehicle (PV) market and continues to enjoy a robust pipeline of new launches, particularly compared to the depleted competition. While the Indian PV industry has always been concentrated with the top

3-4 OEMs (c75% of the market), larger competitors like Honda are now slowly losing ground to Maruti as well. Further, most of the fringe players (15+ OEMs have 25% of the market) seem unlikely to make a meaningful impact in the foreseeable future, and are reliant on growing exports to provide viability to their India operations.

Product portfolio the real strength of Maruti today

Maruti’s strong market positioning is often attributed to extensive distribution reach and low cost of ownership. No doubt this is true, but we incrementally believe the most compelling competitive strength of Maruti is its extensive portfolio of products ranging across a wide price range, creating a “virtuous cycle” of growth. A higher number of successful models (across categories) leads to better cross-selling and upgrades. This leads to higher overall volume and scale of existing customers. This creates a network effect and higher resale value for Maruti cars, attracting customers back to Maruti showrooms. Unlike Maruti, competing OEMs have only few successful models, which makes it tough to retain customers or cross-sell.

The most compelling illustration of Maruti’s product strength is its market share across cities

Maruti’s market share in top-10 cities is not far different than the non-top-100 cities of India. This underlines our thesis that Maruti has products suitable for both Urban and Rural India. Therefore, for fringe players expanding dealerships is not enough and they need to invest in local R&D to have a meaningful place in the Indian PV market.

maruti graph

Will these OEMs exit India anytime soon?

We believe a continued push for exports will provide medium to long-term economic sustenance for these OEMs. Interestingly, OEMs like Renault and Ford, which are 10-15% of Maruti’s size in India, export nearly as much as Maruti in order to gain scale benefits. We raise our DCF-based fair value TP to R5,500 in light of improved market share sustainability given the limited risk from competition, more sustainable margin profile and higher protection against yen volatility (due to Baleno exports). We retain our hold rating, as valuation does not appear cheap.

A difficult future for most of Maruti’s OEM rivals

Maruti’s competitive strength in the Indian car market cannot be overstated, in our view. The company now has 46% (Q1FY17) market share and continues to enjoy a robust pipeline of new launches, particularly compared to the depleted competition. The Indian PV industry has always been a two-club industry: the top 3-4 OEMs (the “big-boys”) and the rest, comprising 15+OEMs (the fringe players). The industry has been always concentrated, with the top 3-4 OEMs capturing c75% of the market. The remaining 25% was contested by more than 15 OEMs. We continue to believe that most of the fringe players are unlikely to make a meaningful impact in the foreseeable future and that their viability relies heavily on the growing exports from India. Importantly, it is not just the fringe OEMs but now even the successful larger companies that are not able to effectively compete with Maruti. Maruti is gaining further traction as OEMs like Honda are losing ground. Hyundai is the only other OEM whose market share is relatively stable.

Product portfolio is the real strength of Maruti today

We believe competition for Maruti will remain weak for the foreseeable future. Maruti has an extensive portfolio of products ranging across a wide price range. Unlike Maruti, competing OEMs have only few successful models, which makes it tough to retain customers or cross-sell. Compared to this, Maruti enjoys a “virtuous cycle” of new and old car sales. The most compelling illustration of Maruti’s product strength is its market share across cities. Maruti’s market share in the top 10 cities is not much different than the non-top-100 cities of India. This underlines our thesis that Maruti has products suitable for both rural/lesser Urban India (like Alto, WagonR, Dzire) and Urban India (Baleno, Brezza etc). For smaller OEMs like VW, GMs and even Honda and Toyota, expanding dealerships is not enough and they need to invest a lot more in local R&D to have a meaningful place in the Indian PV league table.

Exports provide viability to Maruti’s competitors

Lack of broader product portfolio remains the key weakness of most OEMs in India. However, that doesn’t prevent them from exporting to global markets. Interestingly, OEMs like Renault and Ford, which are ~10-15% of Maruti’s size in India, export nearly as much as Maruti. We believe a continued push for exports will provide medium to long-term economic sustenance for these OEMs. Bigger exports provide economies of scale and improve profitability. It is no surprise that despite marginal market share, VW, Toyota and Honda have reasonable profitability. Exports are a big opportunity for Maruti as well. As of now, exports are only 9% of the total volumes of Maruti; however, with Suzuki now comfortable with manufacturing global models just from India and exporting even to Japan, we believe exports could be a much bigger contributor of growth for Maruti in the coming years.

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