Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Maruti Suzuki India Limited (MSIL) at 'CRISIL AAA/Stable/CRISIL A1+'.

 

The reaffirmation of ratings reflects the strong business risk profile of MSIL in the domestic passenger vehicle (PV) market, where it is the market leader, supported by the largest distribution network and improving operating efficiencies. Besides, the ratings are also supported by MSIL’s robust financial risk profile, and superior liquidity position. These strengths are partially offset by partial susceptibility of operating profitability to volatile raw material movements and intense competition and falling sales of small cars in the domestic market, where MSIL continues to be the market leader.

 

MSIL’s PV volumes are expected to register a growth of 6-8% in fiscal 2024, while overall revenues are expected to register a growth of over 20%, supported by higher realisations, due to price hikes taken, as well as increasing product mix in favour of compact cars and utility vehicles (UVs). Earlier, MSIL’s revenue grew by 33% on year in fiscal 2023 primarily driven by 19% growth in overall volumes including exports and more than 13% growth in realization primarily driven by improved product mix in favor of UVs, which have higher realizations. With the semiconductor availability almost back to normal, MSIL is expected to step up production levels, and backed by increasing preference for UVs, enable the company register double digit growth over the medium term. MSIL’s exports are expected to remain flattish in the near term due to economic slowdown in the African and South East Asian countries.

 

The company continues to maintain its leadership position in the overall domestic PV segment with 42% share in the first half of fiscal 2024 and is also the largest exporter of PVs from India. While the share of UVs in the overall domestic PV increased to more than 55% in first half of fiscal 2024 compared to ~51% in fiscal 2023, MSIL’s market share in the UV segment improved to 26% in the first half of fiscal 2024 (17% in fiscal 2023) driven by successful launches of its utility vehicles Breeza and Grand Vitara in fiscal 2023 and Fronx, Jimny and Invicto in first half of fiscal 2024. MSIL continues to enjoy leadership position in the domestic UV segment as well. While the company is operating its plants at close to 90% at present, new capacity currently under implementation, when commissioned will further bolster the market leadership of MSIL.

 

The company’s operating profitability has improved to over 10% in first half of fiscal 2024, due to better operating leverage, improved product mix and moderation in raw material prices. CRISIL Ratings expects MSIL’s operating profitability to sustain at 10-11% over the medium term.

 

MSIL’s financial risk profile remained robust with strong cash generation, sizeable net worth and modest debt levels. Interest coverage and debt/EBITDA ratios were at healthy levels of 62 times and 0.11 times respectively in fiscal 2023 (60 times and 0.07 times respectively in fiscal 2022). Liquidity in the company remained superior with ~Rs 49,000 crores of cash and cash equivalents available as on September 30, 2023. MSIL is also expanding its production capacity by 1 million units at its new greenfield plant at Kharkhoda, Haryana. The construction of the new plant is expected to be completed in 4 phases with phase-1 expected to be completed in 2025. In each phase, MSIL is expected to add 250,000 numbers of additional annual production capacity. Total capital expenditure outlay for the first phase of new plant is expected to be ~Rs 11,000 crore.  The completion of Kharkhoda plant will take the total capacity of MSIL, including SMG, from 2.25 million units per annum to 3.25 million units per annum,. Besides, MSIL also has plans to enhance the capacity by another 1 million units by 2030-31. The entire capex is expected to be funded through a mix of cash accruals and cash surpluses (~Rs.49,000 crore at September 30, 2023)., resulting in continued strong debt metrics.

 

In July 2023, MSIL, announced acquisition of 100% stake in Suzuki Motor Gujarat Pvt Ltd (SMG) from the parent Suzuki Motor Corporation (SMC).  SMG has total capacity to produce 7.5 lakhs vehicles per annum. The acquisition will be completed by issuance of equity shares on preferential basis to the parent SMC and there will not be any cash outgo from MSIL. The transaction is being done on arm length basis and the resultant stake of SMC in MSIL will increase by 1.71% to 58.19% with the allotment of equity shares. The acquisition is expected to be completed by the end of current fiscal and the total capacity of MSIL, including SMG, will be ~2.25 million units per annum. Since the acquisition of SMG does not involve any cash outgo or raising of fresh debt, MSIL’s financial risk profile is expected to remain robust and liquidity will continue to remain superior.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of MSIL along with its subsidiaries, J.J Impex (Delhi) Private Limited and True Value Solutions Limited due to significant business and financial linkages between these companies. Suzuki Motors Gujarat Pvt Ltd (SMG) is consolidated from fiscal 2024 onwards subsequent to MSIL acquisition.

 

Key Rating Drivers & Detailed Description

Strengths:

• Dominant market position in the domestic passenger vehicle (PV) segment: MSIL dominates the PV segment, reflected in its market share of 42% in the first half of fiscal 2024 despite intense competition from peers including Hyundai Motors India Ltd (HMIL. rated ‘CRISIL AAA/Stable/CRISIL A1+’), Kia Motors Ltd, and Tata Motors Ltd (TML, rated ‘CRISIL AA/Stable/CRISIL A1+’) which have sizeable presence in the fast-growing UV segment market in India. The entry level segment where MSIL is dominant with over 60% share is seeing soft demand mainly due increased prices of small cars at the entry level primarily driven by higher inflation and higher compliance cost. Through their new offerings in UV segment especially Brezza, Grand Vitara, Jimny and Fronx, the company increased its market share in the UV segment to 26% in the first half of fiscal 2024 from 17% in fiscal 2023. Recently the company launched its premium UV Invicto as well, which is expected to further enhance its presence in the fast-growing UV segment.

 

In addition to the above, in the recent past, the company successfully launched new refreshes of models (New Baleno, New Swift, New Ertiga, New WagonR) in the mid-to-premium segments, which has improved its product portfolio. Success of existing models, combined with expanding product portfolio primarily in CNG variants (which has been growing) has solidified its dominant market position. For instance, in fiscal 2023, MSIL had 7 models in the list of top 10 models sold during the year. Over the medium term, the company will continue to launch new models in the mid-to-premium segment, as well. Besides, MSIL is proposing to launch its first flex fuel PV by 2025 and launch 6 electric vehicle models between fiscal 2025 and 2031. CRISIL Ratings believes MSIL will maintain its market leadership over the medium term, due to its strong product portfolio and distribution network.

 

MSIL has effectively leveraged its association with its parent, SMC, which has extended product development support, shared technological expertise, and provided access to a broad product range. Besides manufacturing vehicles at its own plants in Gurgaon and Manesar in Haryana, MSIL has also been procuring vehicles from SMG, under a contract manufacturing arrangement, wherein the vehicles were being sold to MSIL at cost. However, post-acquisition, the contract manufacturing agreement has been annulled and SMG will to be a 100% subsidiary of MSIL.

 

• High operating efficiencies engendering cost competitiveness: MSIL's operating efficiency is among the best in the industry, supported by continuous process improvement, high indigenization, established linkages with component suppliers, and flexible manufacturing processes, resulting in effective cost control. Although, the company’s operating margin had declined in the previous years on the account of increasing commodity prices and paucity of semiconductor, the operating margins improved to 9.4% in fiscal 2023 from 6.5% in fiscal 2022 driven by softening raw material cost, better availability of semiconductor chips and better product mix. Over the near to medium term, operating profitability is expected to stabilize at 10-11%.

 

• Robust financial risk profile: MSIL has maintained its robust financial risk profile with large net worth of ~Rs 61,000 crore as on March 31, 2023 and liquidity of ~Rs.49,000 crore, as on September 30, 2023. The company has strong cash generating ability and only modest working capital debt on its balance sheet, translating into strong debt protection metrics. Debt/EBITDA ratio was at a comfortable 0.11 times in fiscal 2023. CRISIL Ratings expects MSIL's key debt metrics to remain at robust levels, as the current 100% share purchase transaction of SMG from SMC will not involve any cash outgo and will be done by issuance of equity shares basis preferential allotment to SMC. Also, MSIL’s annual net cash accruals is expected to be in excess of Rs.11,000 crore, which along with cash surpluses, will suffice to service its sizeable capex plans, including the new plant at Kharkhoda, Haryana.

 

Weaknesses:

• Susceptibility of profitability and market share to intense competition and business cycles: MSIL’s operating profitability, has witnessed high volatility in the past, due to steep increase in raw material prices, and to comply with regulations, and given the price sensitive nature of certain segments like entry level PVs, part of the cost increase has been absorbed, or the pass on happens with a lag, impacting operating profitability. Besides, regulatory requirements also necessitate continuous spend for PV OEMs. This does impact the return on investments made, with most automotive OEMs making heavy investments for complying with regulations. MSIL though appears better placed than most of its peers.

 

The Indian PV market remains highly competitive, with existing and new players launching new models regularly, especially in the compact and mid-size UV segment. The number of players in this segment increased to 19 in fiscal 2021 from 7 in fiscal 2008. With more players and models vying for a share of the growing pie, competition in the domestic PV market is intense. The domestic PV industry has experienced multiple headwinds in the past decade, with fiscals 2020 and 2021 witnessing steep fall in volumes. Also, MSIL’s peers have introduced higher number of UV models earlier and also managed to arrange for semi-conductor chips, which resulted in a dip in overall marker share for MSIL as well until fiscal 2021 and part of fiscal 2022. CRISIL Ratings believes that ability of MSIL to sustain and grow its market share, will depend on its ability to launch successful new variants and models in the domestic market.

 

• Declining sales of small cars in the domestic market:  MSIL continue to dominate the small cars segment with ~91% market share in the first half of fiscal 2024, through models viz Alto and S-Presso. Market share has also risen because most other peers have exited the market, which continues to decline in recent years. Though since 2020, the share of small cars in the overall domestic passenger vehicle market has been reducing. The total domestic PV volumes increased from ~33.7 lakhs in fiscal 2019 to 38.9 lakhs units in fiscal 2023, and to 20.7 lakh units in the first half of fiscal 2024.  This is mainly due to increased prices of small cars at the entry level primarily driven by higher inflation and higher compliance cost in lieu of stringent government regulations. The cost of small cars is further expected to increase with implementation of latest government regulations. The pace of increase in the prices of small cars has been higher than the pace of increase in the domestic household income since the pandemic. Combined with increased preference for feature laden UVs, the share of small cars in the overall domestic PV markets is expected to decline further in the medium term. MSIL has also aligned its production schedule in line with changing consumer preference, thereby resulting in share of small cars in overall MSIL domestic volumes declining. MSIL is expected to continue to dominate the small car segment in the medium term albeit volume growth will continue to remain sluggish, and revival will depend largely on recovery in domestic household income. 

Liquidity: Superior

MSIL has superior liquidity, on account of healthy cash accrual and liquid surplus of over ~Rs 49,000 crore as on September 30, 2023. Cash accruals generated would suffice to meet the incremental capex plants and working capital requirements towards capacity expansion and regular maintenance capex. Financial flexibility is further enhanced by Rs. 5000 crores bank lines which is largely unutilized.

 

ESG Profile of MSIL:

CRISIL Ratings believes that MSIL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. MSIL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence.

 

The automobile OEM industry have a moderate impact on the environment owing to moderate emissions, water consumption and waste generation. The sector’s social impact is also moderate considering the impact of operational activities on the company’s own employees. The company is focusing on mitigating environmental and social risks.

 

Key ESG highlights:

• Company intends to continuously increase the use of renewable energy for manufacturing cars to further boost the capacity of captive solar power generation to 48.15 MWp by FY 2024-25
• Upgradation of inefficient pump sets, motors with energy efficient pump motor sets in Gurgaon and Manesar plant resulting in estimated reduction of 375,121 kWh (269 tCO2)
• LTIFR has reduced from 0.08 in FY 22 to 0.05 in FY 23
• The governance structure is characterized by 33% of its board comprising independent directors. Position of the chairman and CEO are split. It has a committee at the Board level to address investor grievances and also put out extensive disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of MSIL to ESG principles will play a key role in enhancing stakeholder confidence, given high share of financial institution’s shareholding and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings believes that MSIL will maintain its dominant position in the domestic PV segment, supported by a large and successful product portfolio, new launches, strong distribution network, and access to SMC's technology. The company is likely to maintain its robust financial risk profile. Its liquidity position is also expected to remain superior.

Rating Sensitivity factors

Downward factors:

• Significant decline in MSIL’s market position (market share reduces below 30-35%) due increasing competitive intensity.
• Material increases in external debt, in the event of a large capex, denting key debt metrics
• Sizeable increase in pay-out by way of buy-back, dividend and royalty to SMC, resulting in significant decline in cash surplus

About the Group

Incorporated in 1981, MSIL is the market leader in the domestic passenger car industry. In 1982, the Government of India (GoI) and SMC entered into a joint venture agreement, whereby SMC acquired a 26% stake in MSIL. By September 2007, GoI had offloaded its equity to Indian financial institutions, including banks and mutual funds.

 

MSIL currently has 18 models with over 150 variants across segments. These include (i) the mini segment:  Alto, and S-Presso; (ii) the compact segment: Wagon R, Swift, Celerio, Ignis, Dzire, and Baleno; (iii)Tour S; (iv) the mid-sized sedan segment: Ciaz; (v) the vans segment: Eeco; (vi) the UV segment:  Ertiga, Brezza & XL6, Jimny, Fronx, Grand Vitara, Invicto; and (vii) the LCV segment: Super Carry. The company has manufacturing facilities in Gurgaon and Manesar. Along with SMG's unit in Gujarat, total installed capacity is around ~2.25 million units per annum.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Fund & Non Fund Based Limits*	NA	NA	NA	4970	NA	CRISIL AAA/Stable
NA	Proposed Non Fund based limits	NA	NA	NA	30	NA	CRISIL A1+

*Including Interchangeable facilities with Letter of Credit, Bank Guarantee, Cash Credit or Overdraft facility