I have started re-looking at Auto stocks after some time.
Auto being the non-secular growth story, I rarely have bought Auto stocks in the past, and except Hero Motors and Bajaj Auto, I have not bought any auto stock in the past.
I have exited both these stocks long back.
Reason for re-looking at Auto stocks is that: Inflation may come down from here, which may benefit Auto companies to some extent. Margins might expand and with steady income in many sectors, people may start buying vehicles with more enthusiasm.
After some research, I found that, GST on Cars / Sedans / SUV(s)/ Premium Cars in India is as high as 45% or more. I would like to know if this is on par with Developed or other Developing Nations or much higher than that?
If it is very high, Why people should buy Premium Cars and Pay large portion of it as Tax? People will prefer Value for Money cars, and this is the BIG Negative for all Auto stocks in India.
Margins of car makers may not improve much as they can not pass on the RM prices to the buyers since people will buy even lesser cars in that case.
Does this make the whole Auto stock investment not that worth? In general, this industry will continue to remain capital intensive, Low margin, Low ROCE business.
If ROCE is not more than Cost of Capital, how will it create wealth for the individual investor in next decade?
I am curious to know views of others about GST/VAT rates in US, Canada, Europe, and other Developing nations. How the auto industry future in India looks like? Most of the investors often invest in Insurance companies, Energy Exchanges, AMC stocks saying that, there is long tailwind in these sectors. Similarly we should compare scenario of Auto sector in India with Developed nations to see if there are long tailwinds in Auto sector in India or not.
The task of managing the production of 40 lakh units annually, Bhargava added, may necessitate restructuring. He said, “Requires considerable thought and possible reorganisation of the structure of the company keeping in view the best interests of all shareholders as well as other stakeholders of the company. We will, as soon as possible, announce what we are proposing”
Interesting comments around restructuring and what can be inferred from it. If anyone has any thoughts please share.
Though this post is not directly related to company but i want to understand if growing traffic jam can affect sales of car, unless government comes up with more flyovers to accomodate the growing population
Suzuki has setup India’s first Li-ion cell and battery manufacturing plant in JV with Toshiba and Denso (TDSG).
TDSG started production in 2021.
Yet, TDSG does not figure in list of subsidiaries in Quarterly report. My email to them remains unanswered. Aren’t they suppose to declare their subsidiaries?
c635c1bf-fe34-40f0-baf4-0cf68e392fd9.pdf (bseindia.com)
MSIL Maruti Suzuki India Limited
SMC Suzuki Motor Corporation (parent company of MSIL, head quartered in Japan)
SMG Suzuki Motor Gujarat Private Limited (100% subsidiary of SMC in Gujarat, India)
MSIL would be acquiring SMC equity in SMG.
Acquire 100% shares of SMG held by SMC (at net book value in terms of the provisions of the CMA). Pay for the SMG shares held by SMC by making preferential issue of MSIL equity shares to SMC.
It’s part of full restructuring. The company believes that this will increase the EPS and Dividend Payout.
Yes, in the last few years, customer preference has clearly shifted to compact SUVs. So, Maruti was loosing market share. The reason for good nos in last 3 quarters is on the back of 3 SUVs launch. In the last investor presentation, it looks Maruti’s new SUV launches are over. And that is worrying. How long will this momentum last on just 3 new models…
Not sure if people in Mini/compact is upgrading to SUVs. Income gap is huge. I think spending in mid-lower segment is going down. So i was looking from an angle of consumption going down in these segments, if so, will also affect other industries like FMCGs/Textile, etc.
Anyway will look forward Q3 numbers (post festive) to see the trend.
Pls correct me if my analysis is wrong!
Model wise sales breakup will give a better pic i think
There is no study to indicate whether people are upgrading to SUV or not. Only thing clear is that small car’s sales are decreasing and SUVs are increasing. So, the company’s focus must be on new SUV launches.
If you look at the presentation highlighting the new launches eVX and New Swift looks promising. But, eWX, mini wagon EV looks ugly.
So, looks like company’s is trying to woo new small car customers. Then there are other products which may open new segments.
SUV launches are over and that’s concerning.
Yes, it looks like spending in lower segments is going down. Inflation is outstripping the salary growth. I agree, we should be looking cautiously at other companies catering to this segment.
Very strong quarter where every variable went favourable – lower RM prices, adequate semiconductor availability, Dollar strengthening against the Yen, SUVs doing well etc. However, such “all factors moved favourably” will not happen in every quarter.
Industry:
On the demand side, share of CNG vehicles in the industry has now reached ~15%. Share of diesel vehicles continued to decline and is now about 17% compared around 19% during last financial year Hybrid vehicles has seen a good traction and now the share of Hybrid vehicles has increased to about 2%
Management says slowdown in small cars is because costs have gone up due to regulatory action and incomes at entry level have not bounced back to the same extent. However, sooner or later the income levels will catch up and the small car category will see a revival. Only top 3 % of Indian population owns a car today so there is a huge untapped market still there. For industry, small car segment used to be about 34% of the portfolio. Now, it is about 28%. 4. Let us keep in mind that the top 3% of India today owns a car. So, if the car market has to grow, more people have to move from the 97% club to the 3% club.
Company:
New model development time is about four years.
Current year, the capital expenditure should be above INR 8,000 crores (this excludes SMC capex which is yet to be decided)
There is a 10% reduction in the percentage of first-time buyers from the market for us
The company has close to 2.3 million units of annual manufacturing capacity.
Q2 performance:
This was the highest sales in a quarter ever, which is even more commendable considering this was a seasonally weak quarter. Company has gained market share. Exports were also strong.
Pending orders at the end of quarter 2 has come down to ~288,000 units and further corrected to 250,000 today (27-Oct-2023). CNG accounts for around 123,000 units out of this. Ertiga is one major model with about 73,700 units in the pending orders. Then, we have the Brezza, the Grand Vitara, the Jimny, Fronx and Invicto. So, a large part of pending orders is for the SUVs, which have been recently launched
Diverging demand patterns between utility vehicle and small car segment is continuing. Proportion of small cars and first-time buyers is coming down in their portfolio.
The major benefit to margins has come from the commodities and the cost reduction that we have been able to achieve. There has been a significant softening in the prices of precious metals commodities.
The sales promotion cost is about INR 17,692/vehicle in the Q2 FY23-24, we were INR 16,214/vehicle in the Q1 FY23-24, so marginally higher.
In commodity prices, 50 % of the basket is steel and steel prices have started inching up again. There was a very sharp decline in the precious metal prices.
Future:
Going forward, the Company plans a 3-fold increase in its exports volume by increasing its exports to 750,000 -800,000 units/ year by 2030-31 (this comes to 17 % CAGR)
We are talking about capacity expansion. Capacities will go up by 2 million.
Transiting to EV - over the period of next six years, six new models are coming in.
On SUVs - We’ve announced in our annual report that currently from about 17 models, we will move up to about 28 by the turn of the decade.
One of the reasons for SMG integration is that it gives us flexibility and agility to quickly respond to the changes in demand.
Maruti’s Game plan seems to be playing out very well.
(1) Strategy -1
Not in a hurry to introduce EV during this ongoing euphoric period when the cost stricture, supply chain for EV is not yet well established…Maruti did not get allured by lower GST of 5% GST as against 48% for petrol. Perhaps their objective of offering a people’s low cost EV car may not have worked out in spite of lower GST of 5% being offered by Govt.
Also uncertainty about Govt’s lower GST offer for EV- How long Govt can give subsidy?
So , roll out EV only after dust settle down & EV supply chain gets stabilised and their own EV battery plant in Gujarat starts producing EV batteries. They are aiming only 30% EV of their portfolio by 2030.
(2) Strategy -2
Diesel vehicles are notorious in releasing SPM/RSPM in to air and Maruti realised this ahead of other peers that diesel it is not a sustainable technology and sooner or later it has to be banned.
So Phase out completely Diesel vehicles- first in the Industry to take a bold step. This strategy is also playing out well. Delhi has banned diesel vehicles and many cities like Mumbai which are heavily polluted may also ban disel cars and sooner or later many other cities may take similar curbs.
So who is likely to gain - EV, Petrol , CNG ,
(3)Strategy 3
Maruti’s EV strategy is as per strategy 1
So how does it perform and execute its business Goals.
Focus on petrol Hybrids and CNG. This strategy has also played out well.
On CNG , Maruti had the first mover advantage in rolling out it’s CNG range…They are the market leaders as OEM of CNG cars since last 12 years and now it is accelerating at a faster pace aiming to sell 4,50,000 CNG cars this fiscal. These cars can run with CBG as well They have now collaborated with Gujarat milk federation to produce Bio gas - CBG from cow dung to fuel Maruti Cars in place of CNG
(4) Strategy 4
: Partner with Toyota to get Hybrid technology initially and then later switch to Flexi Hybrids.
This technology allows Ethanol to be used in place of petrol.in all possible ratio’s.
Maruti’s smart hybrids now selling like a hot cake as many customers find the advantage over EV with regards to Range and charging infrastructure.
So currently , Hybrids and CNG is 40% of it’s total sales
And Look at the growth rate of Hybrids cars in India ?
It is almost equals the EV cars in spite of the fact that EV carries 5 % GST and Hybrids carry 43% GST…
So who moved my cheese ?
By the time peers like TML & others in the industry have realised this …it is too late to catch up. yes, CNG- many have already started …but Hybrids …right now many like TML yet to come out with a Hybrids.
Look at what RC Bhargava said on Q2 results
Discl : Invested , may be biased. please do your own assessment before investing
Interesting to know that, while only Top 3% people own cars in India (which seems to be the lowest even in Developing Nations) is leading to the highest polluted cities like Delhi and Mumbai in the world.
This highly polluted cities will become even more polluted if actually more than 10% people will own cars, in cities and rural areas combined. People from Rural areas will also start using cars leading to more polluted towns.
So it seems that, EV and CNG vehicles need to cross at least 50% to keep our cities breathable.
Yes , Car penetration in India is very low when compared with other developing / developed nations and there is no denying the convenience of private cars over public transport.
EV CNG/CBG & Flexi Hybrids, Hydrogen will have definite Roles to play in fighting city pollution levels in future days
But our City traffic planners also need to proactively plan for Ring Roads, Flyovers, Metro’s which would decongest most cities and I think there are lot of efforts being put towards this.
Delhi is bad because of stubble burning by farmers community in 4 states namely Punjab, Hariyana, UP, Rajasthan within a radius of 50 kms surrounding Delhi.
Especially in winter , when the ground level temperature drops , atmospheric inversion takes place and there is a blanket of heavy pollutants remaining at ground level.
The solution which is being implemented is to utilise this stubble for producing 2G ethanol in stead of burning. Another solution is to decompose stubble there in the field itself to produce Fertiliser for the land. The implementation seems to be slow., as the extent of work needs to be done requires a lot of capital.
Mumbai is well placed to face the pollution level since it is surrounded by Sea and by land breeze the pollutants can be carried over to Arabian Sea
Yes, more efforts are needed to curb pollution across all cities in India, as using EV may not be possible for all.
Air Pollution awareness is very poor in India which acts as a major opponent for efforts made by authorities.
I am personally not using any private vehicle for the past several years as I mainly work from home or need to visit offices for few days in a month. At personal level, I have used private vehicles only when required, but I do not see people doing the same.
Anyway, being an investor earlier in Auto stocks, I believe that, there is long runway for Auto companies ahead specifically in Hybrid, CNG and Hydrogen or EV vehicles.
In the Q3 concall, Maruti management gave the contours of the company’s first electric vehicle set for launch later this year. It will be a premium segment vehicle bigger than the Grand Vitara with a high range.
Acquire 100% shares of SMG held by SMC (at net book value in terms of the provisions of the CMA).
