Maruti Suzuki India - Sticking to its roots with Alto 800; maintain Buy - BRICS

Maruti Suzuki has been under pressure to improve its volume in the micro and mini segments due to intensifying competition from Hyundai and Tata Motors. The new Alto 800 (entry-level segment) could be the answer to the stiff competition in the passenger car segment. We believe that Maruti's pricing strategy for Alto 800 (starting at Rs0.24mn) and improved mileage of its petrol version (23kmpl) will attract consumers who prefer diesel cars due to their lower cost of ownership. Maruti's decision to launch the CNG version of Alto 800 could be a pre-emptive measure against the probable launch of diesel Nano (Tata Motors) and the existing diesel Beat (GM). The diesel version of Beat is priced at Rs0.57mn (ex-showroom), whereas Alto 800 CNG is priced at Rs0.36mn, thus providing consumers a price advantage, apart from higher mileage. Maintain Buy on Maruti with a price target of Rs1,456.

Alto 800 is available in petrol (maximum price of Rs299,000) and CNG (Rs356,000) options and aims to restore the company's gradually dwindling sales in the mini/compact segments. The mini segment currently contributes 21% of industry volume and 43% of Maruti's total sales. For Maruti, the mini segment has been steadily giving way to hatchbacks - the revenue contribution of the mini segment in Q2FY13 is estimated to be 20%, down from 31% in Q2FY12 - and the new Alto 800 is aimed at arresting this decline.

Increasingly discerning consumers face rising fuel prices & inflation: The Indian auto market is witnessing a shift to more powerful and bigger cars, as traditional mini segment users opt for super-compacts, sedan users shift to MUVs (MUVs grew 52% YTDFY13), etc. Moreover, fuel prices have been rising steadily (petrol up 5% & diesel up 14% YTDFY13), while inflation has been above 7.5% since February 2012. These cost pressures may induce customers to consider down trading, thus creating a market for cost-effective models, such as Alto 800. This is reflected in the 10,000 bookings received by the company for Alto 800 even before consumers have had a chance to get a look and feel of the new car. We expect Maruti to record incremental sales of3,000-4,000 units/month due to the launch of the new Alto 800, as compared to the old Alto.

No diesel option, but CNG version could be the partial solution: The absence of a diesel option in the new Alto 800 hardly comes as a surprise, as it is a small family car that is rarely used enough to make a diesel version a viable option. While the upfront price differential of Rs20/litre between petrol and diesel could be viewed as a hurdle, Maruti has been engaging its target consumers over the last six months and educating them that diesel engines are beneficial only above certain usage levels. A petrol mileage of 22.7km/litre and CNG mileage of 30km/litre could provide sufficient incentive to consumers to opt for the CNG version of the new Alto 800. Although CNG is not available across India, we expect a higher demand from bigger cities where CNG is available. Also, higher mileage and attractive pricing of the petrol version of Alto 800 could satisfy the requirements of consumers who are interested in small diesel cars.

Fending off the growing competition in a crowded market: Since its launch in 1984, Maruti has always enjoyed the first mover advantage in the small family cars segment. The company sold an average of 15,000 units of the original Alto per month for eight years and the model was due for an upgrade. Maruti has spent over Rs2.7bn on vendors andRs2bn towards the development and design of the new Alto 800. Lower investment towards development provides the company the single biggest advantage in pricing its models attractively.

New MNCs have successfully forayed into the entry level segment, though they have been unable to sell their vehicles at low prices, which is a major requirement for the Indian consumer. However, new models that are expected to be launched, such as Datsun and Dacia, and Volkswagen's small car offering, are likely to be available at low price points and could create competition for new Alto 800. However, Maruti's key strengths, such as competitive pricing and providing a combination of features, are likely to allow the company to fend off the stiff competition from these new models.

New Alto 800

The Alto 800 will be manufactured at Maruti's Gurgaon facility and will be available in 3 petrol variants and 3 factory fitted CNG variants. The petrol variant provides a mileage of 22.74km/litre. Although shorter by 10cm than its earlier version, the rear seats in the new Alto 800 have additional leg space of 15cm.

The company plans to export the Alto 800 to Latin American and African countries from January 2013 onwards.

Valuation

The stock trades at 17x and 13x FY13E and FY14E respectively. We maintain our estimates and price target of Rs1,456 based on 14x FY14—Maruti's five-year average multiple was 15x. We believe that upcoming triggers, such as improvement in sentiments due to a decline in interest rates, rising per capita income, improving urban infrastructure, low penetration, and easy availability of finance will drive the growth in the passenger car industry. We maintain our rating of Buy on Maruti with a price target of Rs1,456.

Source : Equity Bulls

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