Tuesday, October 27, 2015

Maruti Suzuki (MSIL IN) Baleno: Old name, new game

INDIA | AUTOMOBILES | Company Update

26 October 2015
 The launch of Maruti’s new premium hatchback offering, Baleno, and came out positively surprised with the aggressive pricing and product offering. Baleno targets the new ‘premium hatchback’ segment, currently dominated by i20, Polo and Jazz. Our analysis suggests that this segment (which Maruti did not really cater to) has been the fastest-growing in an otherwise sluggish market (now c.12% of the passenger car market; chart1). With aggressive pricing, we believe Baleno offers a better bang for its buck than peers — we see it taking away market share from the current stalwart i20 and from ‘entry sedans’. Our only fear is that Baleno could cannibalise Swift-family sales due to proximity in pricing (table 2). We expect +8,000 in monthly volumes for Baleno over FY17.

 Maruti as our top pick to play the recovery in Indian automotive and we continue to believe this as – (1) it is in the midst of a best model cycle, (2) strong new products pipeline, (3) recovery in urban demand, (4) slow and steady decline in discounts, (5) robust margin expansion, and (6) market-share wins. We have a BUY rating on the stock with TP of Rs 4,700; 

Baleno – priced to perfection

 Maruti’s aggressive pricing of Baleno, especially given that it offers better features than competition. Priced at Rs4.99 Lakh onwards (ex-showroom, Delhi) the vehicle undercuts competition by 3-7% variant-to-variant (table 1). Not only this, it looks attractive for new Maruti Swift customers, which begets the question —could this aggressive pricing lead to some cannibalisation of Swift/Dzire sales? Baleno does not offer a hybrid diesel variant since it is already in the 12% excise bracket (Maruti launched Ciaz hybrid to reduce excise to 12% from 24%). We expect Baleno to be a blockbuster product with a strong waiting period (expect 8,000 units per month sales until FY17). The only constraint we see is Nexa’s current limited reach — however, our checks suggest Nexa is already present across 36 cities with 80-85 showrooms, and the company is rapidly expanding its reach. With an initial target of 100/month we believe our estimates are very much achievable even with Nexa’s current dealership strength.

Nexa interactions (dealer and customers) boosts confidence in our assumptions

With 150+ pre-bookings (at the dealership we visited), Baleno is expected to be a strong volume churner for the Nexa chain. We spoke to a couple of customers who seemed impressed with the product offering and pricing — they were primarily upgrading from Hyundai Santro, i10 or were lateral shifts from the older Hyundai i20. While we didn’t come across any Swift owners at dealerships, our interaction with sales executives suggests cannibalisation of existing Swift volumes.

S-Cross still holding on

S-Cross sales continue to be strong despite negative pricing commentary across media. The dealership we visited has been consistently delivering 4-5 units a day, implying a monthly run-rate of over 100 units. We expect S-Cross to clock over 4,300units/month in FY17 with rapid expansion of Nexa dealerships helping.


Trading at rich 19x our FY17 earnings, we believe Maruti is still the best play on a recovery in Indian automotives. MSIL’s positive earnings trajectory will play out over the next 1-2 years because of triggers such as volume/mix/margin surprises. We remain optimistic and reiterate Buy with a TP of Rs 4,700.

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