India Passenger Vehicle Sector: A tale of two leaders
Within passenger vehicles, we expect the cars segment to post healthy 10% growth in FY17E on the back of improving affordability, a payout from the 7th pay commission and expectation of a normal monsoon. However, the UV segment is likely to witness muted growth as the regulators continue to discourage large diesel sales – we factor in UVs to grow at a slower 7% in FY17E. In cars, notwithstanding rising competition, Maruti has continued to outperform the industry over the last 4 years. Even in FY17E, we expect MSIL’s market share to improve to 53% on the back of new launches and benign competition. We expect MSIL to post 26% earnings CAGR over FY16-18E on the back of strong volume growth. On the other hand, for M&M, while volume growth in both UVs and tractors is likely to improve, margins are likely to be under pressure due to cessation of tax incentives at Haridwar and an adverse mix – we factor in 12% earnings growth for M&M over FY16-18E. We initiate coverage on Maruti with a BUY rating and a FV of Rs4,526 and on M&M with a NEUTRAL rating and FV of Rs1,287.
Cars momentum to continue, UVs to remain subdued
The domestic cars segment is likely to sustain healthy growth momentum in FY17E on the back of an improving economic outlook, expectation of a normal monsoon and payout from the 7th pay commission – we factor in 10% growth for FY17E. While these factors are true for UVs, regulatory headwinds like the ban of large diesel vehicles in NCR and differential taxation of diesel vehicles in the budget are a clear signal to discourage large diesel vehicle sales in India. As a result, despite a slew of new models lined up, we expect UV industry growth to remain muted at 7% for FY17E.
Maruti likely to sustain leadership position in cars
Maruti has continued to maintain a dominant leadership position in cars despite rising competitive intensity: its market share has actually improved by 80 bps yoy in FY16 to 52.7%. Such has been its dominance in the industry that it is a market leader across all key segments in the industry. While competition is likely to remain benign, we expect MSIL to improve its market share in cars marginally by 20bps to 53% in FY17E on the back of a healthy launch pipeline.
M&M: looks well placed to regain part of its lost share in UVs
After having lost substantial market share between FY12-15, M&M now looks well placed to regain part of its lost share: it has launched 3 new models in the compact UV segment in the last 6 months. It also plans to launch petrol options for all its SUVs over the next few years. As a result, despite rising competition, we expect M&M to gain 200bps market share to 40% in FY17E.
We prefer MSIL over M&M
We forecast MSIL to post 26% earnings CAGR over FY16-18E led by strong volume growth even as headwinds from an appreciating yen are likely to be offset by exports to Japan and an expected reduction in discounts. We value MSIL at 18x FY18E core earnings – in line with its long term one year fwd avg. For M&M, while volume growth in both UVs and tractors is likely to improve, margins are likely to be under pressure due to cessation of tax incentives at Haridwar and an adverse mix. As a result, we expect M&M to post 12% earnings CAGR over FY16-18E. We initiate coverage on Maruti with a BUY and a FV of Rs4,526 and on M&M with a NEUTRAL rating and FV of Rs1,287 (SoTP based).