Detailed Rationale

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

 

Fiscal 2021 was a challenging year for the automobile passenger vehicle (PV) industry following COVID-19 lockdown restrictions, structural slowdown in growth, lower exports, and supply chains issues, which resulted in volume contraction of 9.1% during the fiscal across the sector. After a weak first quarter where automobile dealerships were also shut, demand gradually picked up, supported by preference for personal mobility, and sale volumes registered strong growth in the second half of fiscal 2021. However, due to low sales initially, overall PV volumes dropped in fiscal 2021. MSIL's overall sales volume also declined by 6.7% in fiscal 2021. Further, earnings before interest, tax, depreciation and amortization (EBITDA) margin over net sales declined to 8.3% on the backdrop of commodity inflation and lower operating leverage, from 10.4% in fiscal 2020.

 

Despite the slowdown in demand and aggressive growth by new overseas entrants, especially in the sports utility vehicle (SUV) segment, MSIL retained its stronghold in the Indian PV market and maintained its dominant position with overall retail market share of 48% (including supplies to Toyota) in the PV segment during fiscal 2021. Strong brand, extensive product portfolio, wide distribution network and established presence in the entry level small car market, helped MSIL sustain its marker leadership.

 

MSIL is expected to register healthy growth in fiscal 2022 over low base of 2021, both in domestic and export markets as geographies ease restrictions, increasing preference of personal mobility in domestic market and improvement in discretionary income of households. The company’s parent, Suzuki Motor Corporation (SMC), through another subsidiary, Suzuki Motor Gujarat (SMG) has also completed commissioning of its third unit at Gujarat, and additional supplies will help MSIL ramp up its volumes. The company has also undertaken price hikes in January 2021 and April 2021 to mitigate impact of rising input costs, which should support improvement in profitability.

 

MSIL remains best placed to sustain its market leadership in the PV segment supported by its established dealer network, new product launches, healthy share of non-metro markets and demonstrated acceptance of its top selling models in the past couple of years.

 

The ratings continue to reflect MSIL's dominant position in the domestic PV segment, healthy operating efficiencies, robust financial risk profile, and superior liquidity. These strengths are partially offset by partial vulnerability of operating profitability to intense competition and cyclical automotive sales.

Analytical Approach

For arriving at its rating, CRISIL Ratings has consolidated the business and financial risk profiles of MSIL along with its 100% owned subsidiaries, J.J Impex (Delhi) Private Limited and True Value Solutions Limited.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

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 48% in fiscal 2021 despite the challenging market conditions.

In the recent past, the company successfully launched new models (Ignis, Baleno, Vitara Brezza, New Swift, New Ertiga, New WagonR, New S-Cross and XL6) 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 grown by ~50% during 2021) has solidified its dominant market position. For instance, in fiscal 2021, 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, while focusing on the entry segment. 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, it sources vehicles from SMC's wholly owned subsidiary in Gujarat, SMG, under a contract manufacturing arrangement, wherein the vehicles will be sold to MSIL at cost. The project has been implemented in 3 phases of 2.5 lakh units each. The company commenced operations in Plant I from February 2017. Plant II and powertrain plant from January 2019. Plant III operations has also begun from April 2021, taking total capacity of the Gujarat plant to 7.5 lakh units annually and cumulative installed capacity of MSIL plus SMG to 20.58 lakh units, which will add incremental revenue to the company.

 

 * High operating efficiencies engendering cost competitiveness: MSIL's operating efficiency is among the best in the industry, supported by continuous process improvement, high indigenisation, established linkages with component suppliers, and flexible manufacturing processes, resulting in effective cost control. Although, the company’s EBITDA margin declined to 8.3% during fiscal 2021, due to lower capacity utilization, rising input costs and low volume offtake, it is expected to gradually improve over the medium term with ramp up in demand.

 

* Strong financial risk profile: MSIL has maintained its strong financial risk profile with estimated large tangible net worth and liquidity of Rs 52,000 crore and around Rs 44,000 respectively, as on March 31, 2021. The company has strong cash generating ability, and is almost debt-free. The company is planning to set up a greenfield project in Haryana over a period of 8-10 years to shift production from its Gurgaon plant owing to congestion issues, which can be funded from internal accruals and liquid surplus. Therefore, CRISIL expects MSIL's key credit metrics to remain at robust levels.

 

 Weaknesses

* Susceptibility of profitability and market share to intense competition and business cycles: The Indian PV market remains highly competitive, with existing and new players launching new models regularly, especially in the compact and mid-size 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 will intensify. MSIL's presence in the premium PV segment, though improving, remains modest. This segment is witnessing higher growth than the entry and sedan segments. CRISIL Ratings believes that MSIL's market position and operating profitability will depend on its ability to launch successful new variants and models in the domestic market.

 

The domestic PV industry has gone through 3-4 cycles in the past decade, with fiscals 2020 and 2021 witnessing fall in volumes. This does impact 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, given that a sizeable part of its recent capacity investments were also made by SMG.

Liquidity: Superior

MSIL’s liquidity position is superior, on account of healthy annual cash generating ability and liquid surplus of around Rs 44,000 crore as on March 31, 2021. Cash accruals generated would are more than suffice to meet incremental capex (non-capacity expansion related) plans and working capital requirements. Financial flexibility is further enhanced by largely unutilised bank lines of Rs. 3000 crore. While MSIL is expected to provide financial support its dealer network and also vendors to tide over the challenging business environment, its liquid surpluses will still remain sizeable.

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 share by over 10-15% due to intensified competition
• Material increase in external debt, in the event of a large capex severely impacting its debt metrics; for instance gearing of above 1 time
• Sizeable increase in pay-out by way of buy-back, capital reduction, dividend or royalty to SMC, resulting in significant decline in cash surplus.

About the Company

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. The ownership structure changed in fiscal 2003, when SMC increased its equity stake making MSIL its subsidiary; SMC currently holds 56.37% stake in MSIL. By September 2007, GoI had offloaded its equity to Indian financial institutions, including banks and mutual funds.

MSIL currently has 17 models with over 150 variants across segments. These include (i) the mini segment: Alto and S-Presso; (ii) the B (compact) segment: Wagon R, Swift, Celerio, Ignis, Dzire, and Baleno; (iii) C (super compact) segment: Tour S; (iv) the D (mid-sized) segment: Ciaz; (v) the vans segment: Eeco; (vi) the SUV segment: Gypsy, Ertiga, S-Cross, Brezza & XL6; and (vii) the LCV segment: Super Carry. The company has manufacturing facilities in Gurgaon (two plants) and Manesar (three plants). Along with SMC's unit in Gujarat (3 plants), total installed capacity is around 20.58 lakh units per annum.

Key Financial Indicators(Consolidated)

As on/for the period ended March 31	Unit	2021	2020
Revenue	Rs. Cr	70,372	72,920
Profit After Tax (PAT)	Rs. Cr	4,389	5,678
PAT Margins	%	6.2	7.8
Adjusted debt/adjusted networth	Times	0.01	0.00
Interest coverage	Times	55.85	58.27

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Crs)	Complexity Level	Rating Assigned with Outlook
NA	Proposed Fund-Based Bank Limits*	NA	NA	NA	2950	NA	CRISIL AAA/Stable
NA	Proposed Non Fund based limits	NA	NA	NA	50	NA	CRISIL A1+

*Interchangeable with non-fund based facilities to the extent of Rs 2330 crores

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
J.J Impex (Delhi) Private Limited	Full	100% shareholding and business synergies
True Value Solutions Limited.	Full	100% shareholding, common management and common promoters