Maruti Suzuki: Capex intensity set to rise substantially

10 Oct 2023 , 10:38 AM

Recommendation: Add; Target price: Rs 10575

 

Maruti released a presentation, in the context of the proposed termination of contract manufacturing agreement (CMA) with Suzuki Motor Gujarat (SMG), and acquisition of 100% of SMG from Suzuki. Maruti plans to acquire SMG at net book value, in line with Street expectations. If Maruti pays Suzuki by issue of shares, it would result in EPS dilution of ~4%. Two points stood out — 1) Maruti targets growing exports by 3x over FY23-FY31. 2) The company estimates total capex till FY31 to be Rs1.25trn. As % of revenue, analysts of IIFL Capital Services estimate that this implies capex of ~7% over FY24-FY31 vs ~5% capex over FY15-FY23. As a result, analysts of IIFL Capital Services expect Maruti’s FCF generation to moderate and PAT-to-FCF conversion to drop from ~100% over FY15-23 to ~60% from FY24. 

Expects to outgrow industry; targets high growth in exports: 

Maruti expects the PV industry to grow at 6% Cagr over FY23-31, to reach about 6mn units. Of this, 15-20% would be EVs and about 25% would be Hybrid. Against an industry growth of 50-60% over FY23-31 (not Cagr), the company plans to almost double its volumes from ~2mn in FY23 to nearly 4mn by FY31. In addition to market share gain in Indian market, Maruti targets growing exports 3x over FY23-31. 

Aggressive capacity expansion; model launch plans: 

Maruti plans to expand its model line-up from 17 models currently to 27-28 models by 2031. Of these, six models would be EVs, the first of which would be launched in FY25. This works out to launch of approximately one EV model and one non-EV model every year, starting FY25. Maruti plans to expand its capacity from the current 2.25mn to 4.0mn by FY31 (possibly, net of capacity reduction in Gurgaon). A capacity of 1mn is planned in Kharkhoda (Haryana) and another 1mn at a new location. 

Capex intensity set to rise; PAT-to-FCF conversion to moderate: 

Maruti expects cumulative capex till FY31 of Rs1.25trn, including Rs450bn for capacity expansion and Rs800bn for maintenance capex and R&D/product development. Analysts of IIFL Capital Services estimate this translates to 7% of revenue over FY24-FY31, vs capex at 5% over FY15-FY23. This will bring down PAT-to-FCF conversion from ~100% over FY15-23 to ~60% from FY24.