Maruti Suzuki's ₹10,500 crore India EV plan: How will it impact the stock's near-term prospects?

India's electric vehicle (EV) industry saw a new entrant on March 20 as Suzuki Motor said it will invest $1.3 billion (nearly ₹10,445 crore) into electric vehicle and battery productions in India.

Suzuki Motor Corporation (SMC) signed MOU with the State of Gujarat for local manufacturing of electric vehicles and BEV batteries.

Suzuki and the State of Gujarat signed an MOU on March 19 at the India-Japan Economic Forum held in New Delhi, in the presence of Japanese Prime Minister Fumio Kishida and Indian Prime Minister Narendra Modi. Toshihiro Suzuki, Representative Director and President, Suzuki Motor Corporation and Kenichi Ayukawa, Managing Director & CEO, Maruti Suzuki India were also present along with senior government personnel of India and Japan.

"Suzuki's future mission is to achieve carbon neutrality with small cars. We will continue active investment in India to realize Self-reliant India (Atmanirbhar Bharat)," said Suzuki.

Besides, another group firm Maruti Suzuki Toyotsu India (MSTI) will make an investment of ₹45 crore on the construction of a vehicle recycling plant by 2025.

In November 2019, Maruti Suzuki and Toyota Tsusho Group had announced a joint venture for vehicle dismantling and recycling and set up a unit in Noida, Uttar Pradesh.

Maruti Suzuki is looking to launch an affordable EV in India by 2025.

Other players in the four-wheelers EV segment

Earlier, Tata Motors and Mahindra & Mahindra had also announced the manufacturing of EVs in India, eyeing to capture a large section of the Indian market.

Tata Motors has announced an investment of ₹15,000 crore in the e-mobility segment and has plans to launch the EV in India by 2027.

Mahindra & Mahindra intends to invest ₹3,000 crore and has already invested ₹1,700 crore in the EV business in India. It has fixed a goal of putting 5 lakh of its electric vehicles on the road by 2025, as per media reports.

Global manufacturers Hyundai has plans to invest ₹4,000 crore in the EV segment while MG Motors, as per media reports, had announced an investment of $350-500 million in the EV segment in India.

India's EV market is growing. EV penetration in the country is at around 1 percent levels for passenger vehicles (PVs), up from 0.4-0.5 percent levels last year. However, the top three states (Maharashtra, Delhi, Karnataka) contribute more than 60 percent of EV volumes for cars - this underscores that EV transition in PVs is not yet a broad-based phenomenon, said BofA Global Research in a note.

How will Maruti gain?

This is the first big announcement towards EV from Suzuki in India and it will benefit Maruti Suzuki. However, there is no near-term benefit for Maruti. Even though the story of EV is intact and Maruti Suzuki will play a vital role in the passenger vehicle segment, the announced project will take time to come to reality.

"The announced projects will take some time to pick stream. A healthy order book indicates strong underlying demand and product launches will support market share gains over the medium to long term. In the near term, commodity-led inflation is likely to put pressure on margins," said Arun Agarwal, Deputy Vice President - Fundamental Research, Kotak Securities.

Some brokerages see the development as both positive and negative.

"The planned year for the investment is 2025 for capacity addition and 2026 for battery manufacturing. This will aid Maruti’s plan to launch its first EV in the year 2025 in our view," said brokerage firm Centrum Broking.

"Positive is that the investment is towards EVs. Negative is, assuming that Maruti Suzuki will be the primary user of the facilities similar to the earlier SMG (Suzuki Motor Gujarat, a wholly-owned subsidiary of Suzuki Motor) arrangement, the transfer pricing with higher depreciation cost will hurt Maruti’s EBITDA margins until the production ramps up," said Centrum.

"However, in the current arrangement, SMG is not making any EBIT and with a similar arrangement, earning will not be impacted. Also, there is an opportunity cost of better ROIC if Maruti utilizes its own cash pool (nearly ₹40,000 crore cash including Investments)," Centrum added.

The brokerage firm has a 'reduce' call on the stock with a target price of ₹7,187.

"Maruti has lost 740bps of market share in the domestic PV market over the last two years from the peak of 51 percent on the back of industry shift to the SUV segment. We have cut our FY22 and FY23 margins by 60bps each to 6.6 percent and 9.8 percent, respectively, resulting in an earnings per share (EPS) cut of 9.4 percent and 5.8 percent for FY22 and FY23 respectively. Market share loss on weaker SUV portfolio will continue to haunt company’s valuation in our view," Centrum said.

Suzuki's announcement is an important step for Maruti Suzuki as this will allow it to enter the EV market. However, the company has been late to join the EV bandwagon and the competitors are way ahead in this area, Santosh Meena, Head of Research, Swastika Investmart, observed.

"The company hasn’t changed the timeline to launch the EV and still plans to launch EVs in 2025. Thus, there won’t be an immediate impact on its earnings. Nevertheless, this will act as a catalyst to solidify its EV plans and reduce the EV-disruption overhang on the stock," said Meena.

In the short term, the company could be potentially impacted by both chip shortages as well as a rise in commodity-led raw material prices leading to downward sales volume as well as margins in the short to medium term.

"The company has been losing market share since 2019 due to a lack of new product launches, especially in the fast-growing UV segment. But the next two years look promising as the company will launch new products in the SUV segment and update its existing lineup of cars. The valuations are comfortable as the stock didn't perform for the last four years. Hence, we are neutral on Maruti Suzuki for the medium term but the long-term fundamentals are still intact," said Meena.

On the technical front, as per Harsh Patidar, Auto Analyst at CapitalVia Global Research, in the medium term, the stock looks bullish as ₹6,800-7,000 is an immediate base where key monthly support will be accumulation zone and investors should accumulate in a staggered manner. I am expecting the stock likely to reach ₹9,500-9,700 in 9-12 months.

Market sentiment on the stock is ‘neutral’, according to a MintGenie poll and an average of 46 analysts has a ‘buy’ call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.