Honda's Amaze to have minimal impact on Maruti's volumes

The bigger issue for the country's largest car maker, though, is the muted economic environment

Falling growth in the passenger car segment and a muted outlook saw the Maruti Suzuki stock shed 20 per cent since February. While the stock has recovered part of the losses this month on the back of a weaker yen and market share gains, higher competition and the economic slowdown will put some pressure on the company’s volumes. However, while lowering their FY14 volume estimates for Maruti, most brokerages including Edelweiss and Nirmal Bang also expect a relatively lesser impact on the company versus its other competitors due to Honda’s recently launched diesel car. Since the launch of Honda’s Amaze on April 11, Maruti’s stock has remained flat at Rs 1,425, where it trades at 13.4 times its FY14 estimated earnings.

While Amaze’s launch would take away some share from the market leader (Maruti dominates with over 70 per cent), the impact would be more on weaker brands than on Dzire, given the company’s servicing and after-sales cost advantage, feel some analysts. Given the headwinds from the poor economic environment and rising competitive pressure, some brokerages have cut their price targets for Maruti’s stock. For instance, JP Morgan has recently cut its price target for the next year to Rs 1,535 and P/E multiple to 14 times (which is at a 10 per cent discount to its historical average), given rising competition and sedate industry growth. Citi Research, too, has a neutral rating on the stock, due to a challenging macroeconomic situation and subdued industry outlook. Most analysts, according to Bloomberg data, however, continue to be positive on the stock. According to price targets, there is still an upside of over eight per cent.

More competition, smaller brands to be hit   
Honda’s Amaze competes directly with Maruti’s bestselling sedan Swift Dzire. Citi Research analysts led by Jamshed Dadabhoy say the company’s (Honda’s) diesel variant’s specs – stated fuel efficiency – 10 per cent more than that of Dzire with 33 per cent more power, and price points in-line with the Dzire, should help it rapidly capture market share in this segment. Another sub-4 metre car that is also expected to hit the market in May is utility vehicle leader Mahindra and Mahindra’s Verito Vibe. The hatchback is expected to compete with Maruti’s other money spinner, Swift.

Bank of America Merrill Lynch analyst S Arun says Amaze is likely to eat into the share of Dzire and to a lesser extent, the Swift. However, he believes other models such as GM’s Spark and Tata Motors’ Manza (both pricier and weaker franchises) in the category are likely to be more impacted than the market leader. Honda, moreover, has capacity constraints (can manufacture about 4,500 units a month), which would minimise the impact with fresh capacities expected only after a year. Thus, while Dzire which had an average volume of 14,000 units a month (it clocked 20,000 units in March 2013) will be impacted, weaker brands like Indigo, Etios, Vento, Sunny, Verito, Sail, Manza and Classic could lose a larger chunk of market share than the segment leader.

Volume impact
What has helped Maruti avoid the blushes in FY13 is the strong volumes from diesel-powered vehicles in its portfolio, which account for 30 per cent of volumes. The company ended the previous financial year with a three per cent year-on-year growth in volumes due to higher sales of diesel cars, which helped offset the steep drop of its petrol car portfolio. Nomura analysts believe the FY13 performance was led by strong order books for the Swift and Dzire models and higher exposure to rural markets where growth still remains strong. This also helped the company improve its market share by 300 basis points year-on-year to 45.7 per cent. However, going ahead, given that even diesel car sales have moderated, Gaurant Dadwal of Nirmal Bang has cut volume estimates for the company by eight per cent each in FY14 and FY15 to 1.241 million and 1.407 million, respectively. This reflects an increase of six per cent year-on-year for FY14, which nevertheless is in line with Maruti’s own guidance of a five to seven per cent growth.

In order to sustain growth and counter competition, Maruti is also launching new products. For instance, Maruti has recently launched a limited edition of its D’zire model to counter Honda’s Amaze. Additionally, it plans to launch a multi-purpose vehicle and a sports utility vehicle that will not only fill the gap in its portfolio but will also improve blended realisations. Given the capacity constraints in the diesel segment, Maruti has been gradually enhancing its installed capacity. This has helped the company reduce the waiting period of its Swift and Dzire models from over four to five months to two months currently. More progress is expected on this front, which will help cater to the demand for its vehicles.