Maruti Suzuki Limited | Automobile

Initiating Coverage | 12st Dec, 2012

CMP` 1474
Market Data Bloomberg Code Reuters Code SENSEX NIFTY Dividend Yield (%) 52 Week High/ Low(`) Equity Capital(`mn) Face Value (`) Market Cap (`mn) Avg. 10 day Vol. NSE MSIL.IN MRTI.BO 19229.26 5851.5 0.5 1537.0/905.6 1444.5 5.0 426286.8 536595

BUY

TP-` 1740

Marutis Q2FY13 results were above market expectations, both at the top line level (led by higher average realization) and margins (on lower other expenses). Net revenues grew 6% YoY to `80701.1 mn driven by a 16% surge in realization, while volumes fell 8.7% YoY. QoQ, revenues fell 23% as volumes dropped 22%, while realizations fell 1%. Domestic/export realization growth of (2.4)%/7.9% QoQ came in higher than anticipated.

Source: Ace Equity, R K Global Research, as on 12th Dec12

Key Market Ratios TTM Latest EPS (`) TTM Book Value (`) TTM PE (x) TTM P/BV (x) TTM EV/EBIDTA (x) EV/TTM Sales (x) Mcap/TTM Sales (x)
Source: Ace Equity, R K Global Research, as on 12th Dec12

51.8 551.4 28.3 2.7 12.6 1.1 1.1

Share-Holding Pattern (%)

Promoters FII's DII's Public

9.2% 16.2%

Volume & market share impacted by Labor issues at Manesar plant: During the quarter under review Marutis overall volumes declined 22% QoQ (9% YoY) to 230,376 units. While domestic volumes declined 5.6% YoY (20% QoQ), exports declined 31.7% YoY (37% QoQ). The labor issue at Manesar impacted volumes by ~77,000 units in 2QFY13. Realizations declined 1.6% QoQ (grew 19.5% YoY) to `350,302/unit (impacted by lower diesel vehicle sales (on production constraints) and higher discounts (on weak demand for petrol vehicles), partially negated by higher Ertiga sales (including CKD exports). MSILs market share in the domestic PV industry declined ~600bp QoQ (340bp YoY) to 34.1%, reflecting loss of volumes due to the Manesar labor issue.

20.4%

54.2%

Price vs Sensex
Sensex (LHS)
125 115 105 95 85 75 65 55 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12

Maruti Suzuki

Margins down 19bps YoY/117bps QoQ at 6.1%: RM costs (as a percentage of sales) rose ~180bps QoQ owing to the forex impact on direct imports and higher average per unit discounts (at ` 14,750 vs. `11,046 QoQ), leading to a margin dip. Other expenses, however, decreased 120bps QoQ on a favorable exchange rate impact on royalty provisions and reduction in ad expenses. MSIL reported `430mn of commodity MTM gain in other income. PAT stood at `2274.5mn, -5.4% YoY lower on higher interest and depreciation charge.

Research Analyst Aditya Vikram Jha [email protected]

Valuation & Outlook: The operating environment for Maruti is gradually improving, with (a) initial signs of demand recovery, driven by new Alto launch in festive season, (b) discount stabilization, (c) Rupee appreciation, and (c) possible permanent solution to its industrial relationship problem (with the conversion of temporary workers to permanent workers, and liberal wage hikes). Further, discount reduction and higher diesel engine availability (expected from September 2013) would be the key catalysts for operating / stock performance Currently the stock is trades at 16.2x FY14E with EPS of `96.8 FY14E and based on the current stage of automotive cycle we recommend Buy with a price target of `1,740.
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Maruti Suzuki Limited | Automobile

Investment Rationale: Piling up with opportunity, policy paralysis and uncertain micro.
Maruti leads the Indian passenger vehicle market with FY12 sales of 1.13 million. The company has successfully built a solid reputation in the Indian market, based on strong after-sales service, good quality launches at perceived good value, and low maintenance of its cars. Its dominance in the small car segment is a testimony to the companys: Growing export in Gondwanaland: Pak-Suzukis arm has asked the countrys government to permit the import of parts for the Alto model from India. This is likely to push up Marutis exports and generate `300-400cr revenue. Exports contribute around 9-10 % of Marutis total volumes. However, with the likely elimination of the negative list in December, Maruti could see a jump in its revenue, pushed up by exports of CKDs to Pakistan. The Alto is a successful model in Pakistan, with 13,000 units sold in 2011, largely due to the vacuum in the 1,000 cc space. Brand stability: The Alto launched a decade ago is still the highest selling brand in the industry. Superior Network: with the expanding dealer network, Maruti has managed to create a superior geographical foot print. In FY12 its dealer network covered 1100 outlets in 801 cities and total service points expanded to 2958 workshops in 1408 cities. Brand width: The number of brands (especially successful ones) in MSILs portfolio outnumber those of its competitors; consequently, the company has been able to offer consumers options at multiple price points and in some ways even created newer categories (Swift is credited with creating the premium hatchback category in India and Ertiga looks likely to follow suit in the UV space) Old launches still running at full steam: Even as new players and new launches have thronged the market in the past, MSILs brands continue to deliver on volumes: older brands (Alto/Wagon-R) helping it to sustain market share, and relatively newer brands (Swift/Dzire) helping it better the same. These four brands have helped the company capture demand at multiple price points. Ertiga infusing new life into marutis portfolio: With the Ertiga launch in April 2012 the company is expected to make on road race with 370000 units in UV segment, currently dominated by with M&M. However the company intent to create a new segment altogether within the UV space, Maruti strategically priced the product attractively and also positioned it differently, expanding the target market by including utility vehicles as well as sedan buyers. The company is expecting to sell approx 60000 units of Ertiga in FY13, as per company, total booking till Sep12 stand at 32000 units. Suzuki Powertrain India (SPIL) merger: Maruti recent merger with its associate SPIL into itself, increased value of the company. SPIL is the principal supplier of diesel engines to Maruti; prior to Marutis tie-up with FIAT, SPIL was the sole supplier of these engines to Maruti. In FY12, sales to Maruti accounted for 90% of SPILs revenues. Through the merger, the company seeks to bring in cost efficiencies through higher localization (currently import content for SPIL stands at 30% of net sales), savings through consolidated raw material procurement and reduction of duplication in overheads. Capex Plan: The Company is on track to have expanded capacities in place for potential demand growth in the next two years as the base becomes favorable. The start of the Manesar facility and 500k units of expansion here should take care of demand growth in the coming years. Further, MSILs Gujarat plans (and plant) should gear the company up for structural demand growth over the next 3-5 years.

Pakistan Suzuki: Export of complete knock down (CKD) kits of Euro-II compliant Alto were halted as 159 of its parts were the negative list of items traded between the two neighboring countries (Indo-Pak). Pak-Suzuki then discontinued production of various cars, including Alto, which needed Euro-II compliant engines from June due to emission norms. India is the only country in the region producing Euro-II compliant parts.

Ertiga in Pakistan: It is expected that demand for CKD kits for utility vehicle Ertiga in Pakistan to drive up exports. The car maker started exports of parts and CKD kits this fiscal year. The company has already seen a significant demand for Ertigas CKD kits, which also contributed to a jump in betterthan-expected revenue in the Q2FY13.

After 13 % fall in exports during H1FY13, Maruti is hoping to accelerate the export volumes in the second half. Due to labor problem at Manesar Plant Companys flagship exports model A-Star was not available. Moreover the company will start exporting new Alto 800 to Africa and Latin American countries form Q4FY13 onwards.

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Maruti Suzuki Limited | Automobile

Market Share of PV in FY12

3W 3%

CV 5%

2W 77%

PV 15%

Intensifying competition: Intense competition has, however, reduced the company's market share by more than half, to about 37%, in a little over a decade. To stem its market share decline, Maruti is attempting to better anticipate changing consumer trends. However, highly cyclical demand, high operating leverage, and low switching costs for its customers prevent these benefits from translating into a hefty margin. Additionally, continued labor-related disputes at the company's factories, like the current Manesar plant shutdown, restrain Maruti's ability to grow volumes and profits at a higher rate.

Indian passenger vehicle industry: Small car, big market

PV demand slowly shifting into rural India, sales network coverage become paramount importance. Maruti has the highest network at over 1000 dealers in 700 cities and 3000 Service centers in 1400 cities, a mammoth advantage over its competitors.

India is one of the lowest car penetration levels in the world (12 PVs per thousand people) and among emerging economies, which at current estimates is less than 2%. The penetration range for developed markets (GNI per capita higher than 20000 $), is between 25% and 50%. A recent pan-India consumer survey reveals low car ownership only 40% owned a car versus 70% who owned a two-wheeler. Even emerging economies such as Mexico and Brazil have penetration levels between 15% and 20%. China and India are in the lower single digits, which presents a huge opportunity ahead. Car market depends on discretionary, factors such as employment generation, rise in disposable incomes; increasing affordability, favorable demographics and underdeveloped transport infrastructure have all contributed to healthy growth in passenger vehicle volumes over the past decade. The Indian PV market, continues to be dominated by the car segment has grown at a CAGR of 14.5% over the last decade (13.7% over the last five years), with over 11mn vehicles sold in the past five years. It is estimated that domestic passenger vehicle growth of 7%-15% respectively for FY13-FY14. The Utility Vehicle market too seems to hold considerable growth potential as the Indian buyer looks to upgrade to relatively premium segments of the PV market. Consequently, while volume potential remains very much in place, the revenue potential of the market too is gradually becoming more attractive. The small car segments (mini and compact) continue to rule the roost. Smaller ticket size, relative affordability for the purchase and, to a certain extent, necessity-led buying (owing to scant transport infrastructure in many pockets) are key reasons why the small car segment has historically held sway. Consequently, today 65% of the brands in the mini-to-mid size car market (95% of the market) belong to the mini/compact category.

Maruti is the largest exporter of PV since last eight years, exporting to around 120 countries globally. In 2011, the company exported 2.42 lakh cars (about 40% of our total volumes).

Hyundai exports to global markets from Lebanon and Israel in the Middle East to Australia, about 42% of Hyundai Indias exports go to EU countries such as Germany, Spain, Italy and the UK, which are very quality conscious markets.

Indias Domestic PV sales volume trend

x 100000 30 25 20 15 10 5 FY07 FY08 0.2% FY09 FY10 FY11 FY12 14 20.7% 15 12.3% 4.7% 16 25.7% 20 Domestic PV Slaes 28.2% 25 26 27 YoY gr % 35% 30% 25% 20% 15% 10% 2.0% 5% 0% FY13

Indias Export trend of Passenger vehicles

x 100000 6 5 4 3 2 1 FY07 FY08 FY09 FY10 FY11 FY12 FY13 2 13.0% 2 10.1% Export PV Slaes 53.7% 3 32.9% 14.2% -0.4% 6.0% 4 4 YoY gr % 5 5 60% 50% 40% 30% 20% 10% 0% -10%

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Maruti Suzuki Limited | Automobile

Passenger car exports are likely to stay better than domestic market scenario. While Indian market is expected to report fall in overall car sales compared with last financial year, exports from India may show positive growth despite a weak European market. Major car exporters such as Hyundai and Nissan expect higher numbers, while Maruti is attempting to achieve at least last years export volumes. During FY12, car exports were up 14% despite an EU slow down. However, during April-October 2012 period, passenger car exports grew by 5.7%.
SYNOPSIS OF OEM'S OPERATING IN THE DOMESTIC PASSENBER VEHICLE SECTOR
Company Maruti Suzuki FY'12 PV Sales 1,066,544 Plant and Region Gurgaon, Haryana Mansear, Haryana Total Hyundai Tata Motors M&M Toyata 618,276 351,922 242,508 150,389 Sriperumbudur, TN Total Nagpur, Jaipur Nashik, Akurli Mumbai Bidadi, KTK Current Capacity 1,000,000 600,000 1,600,000 630,000 1,528,000* 304,000** 160,000 1,850,000 670,000 NA NA 310,000 FY'13 End 2012 NA NA 2013 Proposed Capacity Incremental period Updates & details Diesel engine capacity with SPIL=300K FIAT diesel engine sourcing =100K, to be stepped up slowly over FY'13 NA NA NA Capex= 898 Crore Toyata Kirloskar Auto Parts to install aluminium casting and machining lines, to begin operation in early 2014 Opening capacity in 2010 was only 200K, ramp up has been very quick Fords invest in India uptil now = $1Bn Sanand plant to cost $ 1 Bn engine plant to go on stream first in 2014

Renault Nissan Ford

2,743 127,726 114,751

Oragadam, TN

400,000

800,000

2016

Maraimalai Nagar, TN Sanand, GUJ (Proposed)

200,000

NA Vehicle Plant 270,000 Engine Plant 240,000

NA

2014

GM Volkswagen

109,288 76,111

Halol, GUJ Telegaon, MAH Chakan, MAH

225,000 110,000

410,000 130,000

Mid 2013 end 2012

Honda

41,509

Noida, NCR Tapukara, RAJ

120,000

160,000

NA

Skoda Auto Fiat

30,574 17,227

Aurangabad, MAH Chakan, MAH Ranjangaon, MAH

40,000 100,000

NA NA

NA NA

$500 mn invested over 2 year on new Products & expansion. Investment is 580 mn Euro till date production started with skoda Fabia in May 2009, and VW Polo in Dec 2009 Decision to roll out car from Tapukara plant When Noida plant is at full capacity. Takapura initial capacity at 60000. Chakan plant is "joint" under volkswagen Also has engine plant capacity= 200,000. Maruti will source 100K of these per year.

Source for different company: Company Annual Reports, Company websites, News articles. (a) FY12 PV sales refer to only Passenger Vehicles; other commercial 4 wheelers have not been included (b) Current capacity reflects latest available data, actual capacity could have changed. * Tata Motors capacity includes its total installed four wheeler capacity (passenger + commercial), as per Annual Report **Mahindra capacity includes its total installed four wheeler capacity (passenger + commercial) as per Annual Report. Tractors are not included. (c) Luxury brand such as Audi, BMW, Mercedes, and some other small OEMs have not been included.

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Maruti Suzuki Limited | Automobile

Future prospects of PV Industry: Identifying the future trends
Indian passenger vehicles industry are likely to be impacted by fast changing events across the automotive ecosystem be it in the operating environment, customer preferences, competition, distribution channel or supply chain. Automotive companies need to raise the following question and assess how well they are prepared to respond to the opportunities and challenges they present.

Source: E&Y, R K Global Research

As an answer to these questions, the following key trends that will influence vehicle manufacturers, suppliers and dealers on multiple fronts: Increasing urbanization and evolving customer needs to have greater influence on OEM strategies and buying behavior than reactive regulatory policies. BY 2020, Indias population is expected to increase by an estimated 200 million, piling future pressure on the transport infrastructure. While regulatory policies on environmental compatibility and safety norms continues to lag global standard, the uncertainty related to diesel subsidies is likely to hurt demand for diesel vehicles. OEMs are therefore, likely to increase their offering in term of alternate fuel variants (CNG, LPG and also hybrids) and advanced safety features across segments. Increasing risks across value chain position OEMs to deploy range of mitigation strategies Indian auto industry is expecting to be short of 300,000 skilled personnel by 2020 across functions, including R&D and manufacturing, also various economics and geopolitical uncertainty that could threaten competitiveness of their operating in the country. Reforms in labor policies like recently announced National Manufacturing Policies are likely to implement in some time now. In the meantime, industry needs to proactively undertake steps to address labor-related issue through appropriate training, labor retention and compensation policies. With logistics infrastructure lagging behind the pace of the auto industrys expansion, OEMs will need to consider multi-plant strategies. They will look to cluster suppliers to be closer to regions with strong demand potential and for better control of the supply chain.

Indias overall median age of population at 26.2 years is one of the lowest among emerging economies. About 370 million people are in the age group of 0-14 years, (of which 220 million in age group 6-14 years). This represents tremendous buying power in the years to come.

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Maruti Suzuki Limited | Automobile

Marutis sales from rural areas have now touched more than 25% in FY12, compared to only 3.5% in FY08. We feel that this shift in geography is a big advantage for MSILs business, with respect to being relatively better placed than competition in terms of sales distribution network.

Global OEMs gain market share, while competition drives domestic OEMs to bridge technology gap: Apart from localizing production to achieve cost parity and production differentiation, global OEMs also continue to expand their distribution network to tire II, III and IV cities. In response, domestic OEMs are strengthening their technological capabilities through organic and inorganic investments. Local demand remains the top priority of domestic and global OEMs. However, they will be looking to leverage India as an export hub to emerging markets, including Africa, Eastern Europe and South East Asia.

OEMs leverage digital marketing for urban consumers and non-traditional distribution channels for rural markets: With increasing internet presentation and Distribution Network of top players availability on new information channels OEMs are likely to increase their digital marketing spends, especially on the social media. There will likely be emphasis on Maruti innovative promotion tools such as live launch websites and online customer service, Current: 1000 showrooms in among others. In rural market, OEMs are expecting to increase their focus on non670 cities. 2946 service centers in traditional distribution methods, promotion activity to local festival events to spread 1395 cities awareness and increase brand visibility.
Expected: NA Hyundai Current: 336 dealers in cities. 721 service points. 300 rural outlets proposed Expected: NA Tata Motors Current: 450 Expected: 750, FY13 Mahindra Current: NA Expected: NA Toyota Current: 175 outlets Expected: NA Renault Current: 14 dealers Expected: 100, FY13 Nissan Current: 30 dealers Expected: 100, FY13 Ford Current: 200 in 110 cities Expected: 250, FY13 General Motors Current: 250 sales outlets 250 service centre Expected: NA Volkswagen Current: 100 dealers in 73 cities Expected: NA Honda Current: 135 facilities in 77 cities Expected: NA Skoda Current: 82 dealers Expected: 120, FY13 Fiat Current: 67 joint dealers, 167 showrooms Expected: 22, FY13

New entrants using creative business models for mobility, in-vehicle services and after-sales support: With Indias urban population to reach 500 million and the growing infrastructure concerns, consumers will need alternative personal mobility solutions. New entrants such as car-rental companies, multi-brand service networks and group buying companies are already taking a lead to leverage the Indian consumers need for mobility, after-sales services, and need for enhanced bargaining power. Suppliers to enhance local product development capabilities, supply chain competency, and flexibility to meet diverse OEM expectations: Indias auto component industry has significant growth opportunity considering the rapidly expanding EQ, aftermarket and export demand as global and local suppliers adopt various strategies to establish their positions. Domestic suppliers are focused on forming alliance to access best practice in R&D to meet the need to OEMs for faster new product introduction, while global suppliers are setting up R&D centers in India to increase local contents in vehicles and the same time leverage it as a global hub for design and technology. The suppliers community will need to adapt to diverse expectation of OEMs. Domestic manufacturing are greater flexibility and closer engagement; global OEMs on the other hand are expecting quick responsiveness and global quality standard at local cost levels. Dealers to focus on managing their capital agenda, skill development and shifting revenue contribution of high-margin allied services: In particular, franchises of global OEMs will become attractive because of higher margin offers and flexible payment options. Apart from expanding their portfolio of brand franchises, dealers will also look to increase share of high-margin allied businesses including service, parts and vehicle financing/insurance. Increasing rural-urban mix: Domestic Urban Mix has changed: A few years earlier, the top 10 cities accounted for about 60% of total passenger car demand, and this ratio has reduced drastically to about 40% currently. Rural share too has increased with vehicle saturation slowly being approached in some of Indias major cities, Indias automobile growth story is slowly moving towards the hinterland.

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Maruti Suzuki Limited | Automobile

Business Overview: India comes home in Maruti
Maruti Suzuki India, a subsidiary of Suzuki Motor Corp., is the leading passenger vehicle manufacturer by sales and production. It manufactures, buys, and sells vehicles and spare parts. The company also facilitates pre owned car sales, fleet management, and car financing. The company offers a range of cars across different segments with 15 brands and over 150 variants including Alto, the world's bestselling small car. During the fiscal year ended March 31, 2012, the company sold over 1.27 million vehicles, including 138,266 units of exports. Earlier in the year 1981 the company was established as a JV between Govt. of India and Suzuki Motor Corp Japan and was named Maruti Udyog Limited. Production Facilities and Vendor Base: Maruti has two plants at Manesar and Gurgaon, with a combined vehicle capacity of 1.6 million units per annum. Manesar Plant C is expected to add another 250K units of annualized capacity when it goes on stream sometime in FY13. Maruti has a strong vendor base of over 250 vendors, with the main vendor being SPIL (Suzuki Powertrain India Ltd), an associate company (and also fellow subsidiary). It currently sources diesel engines and transmissions from SPIL. MSIL also has a petrol engine manufacturing facility at Gurgaon, and an R&D centre at Rohtak. The Export market: Maruti Suzuki is the largest exporter of passenger car since last eight years, exporting to around 120 countries globally. In 2011, the export business was challenged by the weak global economic scenario, particularly in the European market. The company exported 2.42 lakh cars (about 40% of our total volumes). The geographical mix of Marutis export has reversed to Non Europe 70% and Europe 30%, compared to about 75% Europe in FY10 owing to fall in European sales post the withdrawal of the cash for clunkers scheme in Europe. While, in H1FY13 the companys export volume fell 13% due to labor problem at Manesar Plant; Companys flagship exports model AStar was not available during the same period. However some sign of light can be seen with new Alto 800, The Company is expected to start exporting new Alto 800 to Africa and Latin American countries form Q4FY13 onwards. Presently the company exports consist of 30% to Africa (up from 8 % in FY10). Latin America contributes 28% (up from 5% in FY10). Europes share in the companys exports is now only 18% (from a high of 77% in FY10). Popular models in overseas markets include the iconic Maruti 800, Alto, Alto K10 and A-star. In addition, to bring in more numbers, the company is expected to develop left hand drive DZire to Some of big markets in Africa are Algeria, Angola, Mozambique, Nigeria and Egypt. Segmental business model of Marutis: Domestic Domestic Passenger vehicle (Mini Segment): Maruti is the undisputed leader in this segment, enjoying close to 80% market share on the back of its strong brands (M800, Alto, Alto K10, Zen Estillo and Wagon R). The Alto is Indias highest selling brand, with sales of close to 300,000 units (Hyundai Santro, which sells about 70,000 units) per year. The company has however lost a bit of market share over the last few months owing to loss of production due to labour problems at Manesar. Since Mini segment, being a low cost segment, has the highest sensitivity to macro economic variables such as interest rates and fuel costs. FY12 domestic sales YTD have fallen by about 12%. We however expect a modest revival in

Mini Segment Company Price: /Brand Petrol Maruti Suzuki M800 201408 Alto 268253 Alto K10 308810 Wagon R 341761 A Star 366540 Hyundai Motors Eon 269999 Santro Xing 352025 General Motors Spark 323458
Prices Ex showroom Delhi

Capacity (cc) 800 800 1000 1000 1000 815 1090 1000

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Maruti Suzuki Limited | Automobile

FY13 as company is pushing sales through offering hefty discounts and strong brand value and penetration reach.
Compact Segment Company Price: Capacity /Brand Petrol (cc) Maruti Suzuki Estilo 331899 1000 Swift 436919 1200 Ritz 409392 1200 Hyundai Motors i10 358972 1090 i20 459205 1200 Tata Motors Indica 312200 1200 Vista 393847 1170 Manza 554762 1370 Indigo 463881 1200 General Motors Beat 366394 1200 UVA 413779 1150 Ford Figo 374508 1200 Toyota Liva 401993 1200 Volkswagen Polo 457000 1200 Honda Brio 395000 1200 Jazz 550000 1200 Skoda Fabia 443251 1200 Nissan Micra 413500 1200 Renault Pulse 557000 1460 Fiat Punto 481279 1170
Prices Ex showroom Delhi

Domestic Passenger vehicle (Compact Segment): The compact segment is the most fiercely competitive, global players like Ford, Volkswagen and Nissan have made strong inroads in this segment over past few years and excise duty bracket (upto 13.1 ft / 4000 mm) is only 10%. For any car lengthier than 4000mm, the excise duty is 22% + `15000. Maruti has the best selling model in this segment, the Swift, which is also the third highest selling brand in India (selling close to 125000 units annually). The Ritz also happens to be a popular brand, selling close to 50000 per year. Despite strong brand presence we remain cautious on Marutis prospects in this segment, given the recent strong performance by competitors. We feel that the coverage network advantage and brand value premium of some of its bestsellers like the Swift and Ritz might come under challenge by competition. MSILs high Revenue sensitivity to this segment makes this a key segment for future performance. Domestic Passenger Vehicle (Super compact & Mid Size Segment): Super Compact: The Dzire is the strongest brands in these segments respectively. With the normalization at production at Manesar, we expect Maruti to recover its lost market share in this segment as they move into full capacity. Maruti launched the new Dzire in early February 2012, sharing the platform of the new Swift. Being less than 4000mm, the car comes under the excise slab of 10%. MSIL has added about 150 features to the older version and launched the car at an introductory price of `479000 and `580750 for the petrol and diesel version respectively. Even though there will be tax savings on excise, new features added will negate this to some extent, and incremental contribution is expected to be marginally higher. We expect this car to be a key driver in the Super Compact segment over H2FY13. The Mid Size sedan segment is becoming competitive, and the SX4 has been challenged from the Hyundai Verna and the VW Vento. With production issues at Manesar, SX4 sales have fallen to less than 700 units in October 2012. The Verna and Vento have grown at Marutis expense, at ~3500 per month and ~2500 per month respectively over H1FY13. There is a current order book of about 1 months sales on the Diesel SX4 which we expect to be converted with normalization of production at Manesar. Domestic Passenger Vehicle (Executive Segment): Maruti entered this segment recently with the launch of the Kizashi in February 2011. It has sold about 141 units CY12 YTD (518 units in CY11) out of a total market size of about 55000 units per year. Revenue contribution is this segment is however less than half a percent. Domestic Utility Vehicle Segment: Maruti is a relatively small player in the Utility Vehicle business with its models the Gypsy and the Grand Vitara (premium SUV), which collectively sell about 5500 units per year (Vitara sales are minisucle). The Gypsy costs roughly `550,000 while the premium Vitara is close to `1700000. The UV market is dominated by Mahindra (Bolero, Scorpio, and Xylo); while other players like Tata Motors and Toyota also have significant market share.

Super Compact & Mid size Segment Company Price: Capacity /Brand Petrol (cc) Maruti Suzuki Dzire 504,582 1200 SX4 702,422 1590 Hyundai Motors Accent 506,869 1500 Verna 699,655 1400 Tata Motors Manza 554,762 1370 Indigo 463,881 1200 General Motors Aveo 590,254 1400 Ford Fiesta 550,330 1600 Toyata Etios 503990 1500 Volkswogen Vento 699000 1600 Honda City 770000 1500 Skoda Rapid 675000 1600 Nissan Sunny 583000 1500 Mahindra & Mahindra Verito 495371 1400
Prices Ex showroom Delhi

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Maruti Suzuki Limited | Automobile

Domestic Commercial Vehicles (Van/MPV segment): Maruti is the market leader in the Van / MPV segment with its models the Omni and Eeco, which are available at `232000 and `320784 ex showroom Delhi. It sells about 150000 units annually in this segment. However, the entry of Tata Motors in this segment in FY08 has resulted in a loss of Market share for Maruti. Tatas products in this segment are the Magic/ Iris and the Tata Venture, which collectively are selling about 60000 units annualized. While, with the launch of Ertiga in April 2012 the company is expected to make on road race with 370000 units in UV segment, currently dominated by with M&M. However the company intent to create a new segment altogether within the UV space, Maruti strategically priced the product attractively and also positioned it differently, expanding the target market by including utility vehicles as well as sedan buyers. The company is expecting to sell approx 60000 units of Ertiga in FY13, as per company, total booking till Sep12 stand at 32000 units. Domestic Spare Parts Business Domestic Spare parts are a strong revenue driver for the company, and the ratio of domestic spares to Net Sales has been almost constant at about 5.75% to 6% over the last 3-4 years. We estimate Revenue from Domestic Spares to be at `2380 crores for FY13. Spares parts sales are expected to stay strong due to MSILs network expansion and increasing base of cars plying on roads, requiring regular servicing and parts.

Brand-wise quarterly sales trend of Maruti Suzuki :

BRAND M 800 QoQ % Alto QoQ % A Star QoQ % Wagon R QoQ % Swift QoQ % Estilo QoQ % Ritz QoQ % Dzire QoQ % Sx4 QoQ % Gypsy QoQ % Grand vitara QoQ % Ertiga QoQ % Q3FY11 6869 91926 8828 47003 36746 13061 18493 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 A. PASSANGER CAR (MINI SEGMENT) 8155 6613 5452 4595 6593 18.7 -18.9 -17.6 -15.7 43.5 96542 74095 69342 63732 101119 5.0 -23.3 -6.4 -8.1 58.7 8116 4164 3211 2122 8792 -8.1 -48.7 -22.9 -33.9 314.3 41245 37180 34843 32074 42377 -12.3 -9.9 -6.3 -7.9 32.1 A. PASSANGER CAR (COMPACT SEGMENT) 33672 32832 19188 41493 60016 -8.4 -2.5 -41.6 116.2 44.6 11214 6246 4622 2423 4167 -14.1 -44.3 -26.0 -47.6 72.0 17204 16573 21053 9755 17385 -7.0 -3.7 27.0 -53.7 78.2 A. PASSANGER CAR ( SUPER COMPACT SEGMENT) 31565 25095 20288 24593 40246 12.5 -20.5 -19.2 21.2 63.6 A. PASSANGER CAR ( MID-SIZE SEDAN SEGMENT) 9268 5517 4392 2596 5492 129.2 -40.5 -20.4 -40.9 111.6 B. UTILITY VEHICLES 967 1491 2335 688 867 11.9 54.2 56.6 -70.5 26.0% 26 11 9 0 7 -3.7 -57.7 -18.2 -100.0 1117 NL* NL* NL* NL* Q1FY13 4390 -33.4 60211 -40.5 2881 -67.2 27331 -35.5 55216 -8.0 2374 -43.0 15396 -11.4 46958 16.7 1447 -73.7 1294 49.3% 5 -28.6 17667 1481.6 7001 -55.3 21073 -55.3 Q2FY13 4207 -4.2 49119 -18.4 768 -73.3 36116 32.1 21361 -61.3 2986 25.8 15284 -0.7 26192 -44.2 1414 -2.3 547 -57.7% 4 -20.0 20850 18.0 12795 82.8 18297 82.8

28055

4043 864 27 NL*

C. COMMERCIAL VEHICLES (VAN/MPV) EECO 18988 17833 17156 16263 10465 15653 QoQ gr % -6.1 -3.8 -5.2 -35.7 49.6 Omni 24624 23141 23593 21353 17051 22527 QoQ gr % -6.1 -3.8 -5.2 -35.7 49.6 Source: SIAM, Company, R K Global research NL* stand for Not Lunched

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Maruti Suzuki Limited | Automobile

Maruti Suzuki timeline..

Source: Company, R K Global Research

Competitive analysis of Maruti Suzuki: The right turn: The beam light
Maruti, with about 40% market share, is the largest passenger vehicle manufacturer in India, with many bestselling brands such as Alto and Swift in the Mini and Compact hatchback segments. With interest rates expected to moderate, plans to launch four new models this year in different passenger vehicle segments, and increased availability of high-in-demand diesel engines, Maruti is well-positioned to grow its volumes from its current fiscal lows. Maruti Suzuki's Alto is not only the best-selling mini hatchback in India, but also the best selling small car in the world, outpacing the likes of Volkswagen (Gol and Golf), and Fiat (Uno). Maruti's single biggest market, India, has one of the lowest car densities in the world at eight cars per thousand people and we believe Maruti should be one of the biggest beneficiaries of increased car density.

The game play: Intensifying completion

Intensifying competition in the domestic passenger vehicle segment, especially in the entry- level compact hatchback segment, Maruti's stronghold for a long time, has already eroded Maruti's market share from above 50% to below 40% this year and we do not expect Maruti to fully regain its lost share. While Maruti has traditionally had favorable labor relations, a threat to production and profits could emerge if workers demand increased recognition of their union and an increased share of the pie, as was witnessed in October 2011 Stricter environmental laws and greater consumer preference for fuel-efficient vehicles entail higher research and development costs that make vehicles more expensive to produce and sell. R K Global Shares & Securities Ltd-Private Client Research | Equity Research For Private Client Circulation 10

Maruti Suzuki Limited | Automobile

Maruti operates in a capital-intensive industry saddled with overcapacity, and riddled with intense competition, which along with cyclical demand; make it very difficult to consistently generate economic profits.

Key Concerns: The dark road

Maruti Suzuki operates in a highly cyclical industry whose fortunes rise and fall with macroeconomic trends. The company is also sensitive to interest rates and fuel prices that can cause huge fluctuations in demand as evidenced in the current financial year. Other risks include unpredictability of volumes and product mix due to intensifying competition and demand uncertainty, economic uncertainty in the European markets, changing customer preferences, supply chain disruptions, high operating leverage, and increased capital expenditures and research and development expenses to meet stringent government regulations. Exposure to foreign currency movements could also have an adverse effect on the company's operations. An increase in prices of inputs such as commodities, land, manpower, technology and energy could also lead to a reduction in profit margins. Maruti's labor-related problems add to the woes of a company already grappling with sluggish volume growth and weaker domestic demand amid high inflation and interest rates. Even so, compared with FY12, we think it is still possible that Maruti will generate earnings and cash flow in excess of the prior years' results. Additionally, the loss of unit volume associated with the Manesar lockout is likely to be mostly offset by an increase in utilization

Valuation & outlook:

One Year forward P/E band chart

One Year forward EV/EBITDA band chart

We believe the stock could remain at current levels in the short term on account of the tepid demand environment, though operating environment for Maruti is gradually improving, with (a) initial signs of demand recovery, driven by new Alto launch during festive season, (b) discount stabilization, and (c) possible permanent solution to its industrial relationship problem (with the conversion of temporary workers to permanent workers, and liberal wage hikes). Further, discount reduction and higher diesel engine availability (expected from September 2013) would be the key catalysts for operating / stock performance Currently the stock is trades at 16.2x FY14E with EPS of `96.8 FY14E and based on the current stage of automotive cycle we recommend Buy with a price target of `1,740.

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Maruti Suzuki Limited | Automobile

Company Financials:
Income Statement (`Mn) Descriptions Revenue EBITDA (ExOI) Other Income Interest PBDT Depreciation PBT Tax PAT FY'11 366,184.0 36,385.0 5,088.0 250.0 41,223.0 10,135.0 31,088.0 8,202.0 22,886.0 FY'12 355,871.00 25,130.00 8,268.00 552 32846 11,384.00 21,462.0 5,110.0 16,352.0 FY'13E 430837 37797 7874 1335 44336 18635 25,701.0 5,012.0 20,689.0 FY'14E 504724 52013 9225 1254 59984 22483 37,501.0 8,250.0 29,251.0 Net Block CWIP Investments Current Asset FY'13E 68.5 131.2 10.0 630.4 8.8 6.0 4.8 9.7 10.9 12.8 402.6 21.1 50.4 26.5 21.0 2.2 0.8 2.2 20.1 FY'14E 96.8 172.6 10.0 714.3 10.3 7.4 5.8 11.0 PBT 13.6 16.4 440.7 17.1 37.6 41.4 41.4 2.0 0.7 2.0 16.2 Change in NW Inc/ Dec in Debt Interest Paid Dividends Paid Cash from Financing Net Change in Cash Cash at the Binging Cash At The End Inc/ Dec in FA Change in Investments Cash from Investing Int/Div Receive Depreciation Tax paid (Inc)/ Dec in WC Cash from Operation Inventory Debtors Cash & Bank Loan & Advance Current Liability Creditors Provision Net Current Asset Appl. Of Fund Share Capital Shareholder's Funds Total Debt Diff. Tax Liability Capital Employed Descriptions Balance Sheet (` Mn) FY'11 1,445.0 138,675.0 3,093.0 1,644.0 143,412.0 559,294.0 14,286.0 51,067.0 63,563.0 14,510.0 8,933.0 25,085.0 13,722.0 40,798.0 35,540.0 5,258.0 22,765.0 143,412.0 FY'12 1,445.00 151,873.0 11,749.0 3,023.0 166,646.0 61,321.0 20,000.0 61,473.0 80,227.0 17,965.0 9,377.0 24,362.0 24,498.0 56,376.0 49,391.0 6,985.0 23,851.0 166,646.0 FY'13E 1510 190,428.0 11,910.0 3,023.0 211,362.0 107,020.0 15,000.0 61,473.0 89,947.0 18,886.0 12,984.0 29,553.0 24,498.0 62,079.0 53,664.0 8,415.0 27,868.0 211,362.0 FY'14E 1510 215,971.0 17,910.0 3,023.0 236,725.0 114,537.0 15,000.0 61,473.0 115,937.0 22,125.0 15,211.0 50,077.0 24,498.0 70,223.0 60,412.0 10,081.0 45,714.0 263,725.0 Sources Of Funds

Application Of Funds

Financial Ratios Description Adj.EPS CEPS DPS Book value EBIDTM Pre-Tax Margin PATM CPM ROE ROCE Sales/FA Revenue Growth EBIDTA Growth PAT Growth EPS Growth EV/EBIDTA EV/Sales P/BV P/E FY'11 79.2 115.0 7.5 479.8 9.7 8.5 FY'12 56.6 96.0 7.5 525.7 7.1 6.0 Per Share (Rs)

Margin Ratios (%)

6.2 4.6 9.3 7.8 Performance Ratios (%) 16.5 22.1 65.5 24.6 -8.9 -8.4 -7.8 10.8 13.2 580.3 -3.6 -29.9 -28.6 -29.2

Cash Flow Statement (` Mn) 26,437.0 13,745.0 19,162.0 3,595.0 10,135.0 -10,240.0 4,171.0 34,098.0 -24,114.0 21,253.0 8,269.0 11,384.0 -3,731.0 -1,810.0 27,857.0 -23,125.0 -10,406.0 7,874.0 18,635.0 -5,012.0 1,174.0 41,834.0 -59,334.0 0.0

29,530.0 9,225.0 22,483.0 -8,250.0 268.0 55,666.0 -30,000.0 0.0 -30,000.0 -565.0 0.0 -1,254.0 -3,323.0 -5,142.0 20,524.0 29,553.0 50,077.0

Efficiency Ratios (%)

Cash Flow From Investments

Valuation ratios(x) 13.1 0.9 2.7 24.0

-2,861.0 -33,531.0 -59,334.0 Cash Flow From Financing 0.0 -5,123.0 -278.0 -1,733.0 -7,134.0 24,103.0 982.0 25,085.0 -986.0 8,656.0 -552.0 -2,167.0 4,951.0 -723.0 25,085.0 24,362.0 20,886.0 6,161.0 -1,335.0 -3,021.0 22,691.0 5,191.0 24,362.0 29,553.0

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Maruti Suzuki Limited | Automobile

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