Maruti delivers A Star

BNP Paribas Analysis

The recently introduced Maruti Suzuki A-Star is well positioned to compete in the A2 segment with feature-rich variants and better fuel efficiency, said a recent analysis by a member company of the BNP Paribas Group. Even in a global recession, the study sees increasing preference for smaller cars in Europe and market-share gains for Suzuki. We bring you the report with permission from the authors.

New model focuses on value; performance not far behind

Maruti’s newly-launched hatchback model, the A-Star, is pitted against the Hyundai i10, a competition that caused Maruti’s market share loss in the last year. Our initial review, based on a comparison with competing models and our chats with auto experts, revealed the A-Star has focused on value, with feature-rich offerings and high fuel efficiency, rather than on performance (see Exhibit 4 for comprehensive feature comparison with Hyundai). We believe the new A-Star will help Maruti regain most of its 230bp market share loss in the compact car segment.

Demand still slow; market share recovery will offset

The A-Star and the impending launch of the Splash in Q1FY10 will improve Maruti’s position in the A2 segment, where it has a 57 percent market share but had not launched any new products in the past two years. Maruti is also making its presence felt in the sedan segment (A3), where its market share has increased from about 25 percent to 31 percent since the launch of the Swift Dzire in March 2008.

We are confident export take-off is coming

During a recent meeting, Maruti’s management reiterated its annual export target of 100,000 units of the A-Star and total exports of 200,000 units in FY11. Although European car sales were down 14 percent in October 2008, the increasing preference for smaller cars and the market share gains for Suzuki are positive. We are conservatively estimating 60,000 units of A-Star exports in FY10 and 160,000 units of total car exports in FY11. Our conservative export-growth estimates drive more than half of our revenue growth projections in FY10.

Defensive pick in a bearish market: BUY

We cautioned investors of short-term weakness going into the Q2FY09 earnings. We now reiterate our long-term BUY call on Maruti. Our target price of Rs 760 is based on 12x FY10 EPS. Apart from export growth complementing its domestic franchise, and margin expansion following the cool-off in commodities, we would also highlight Maruti’s strong balance sheet and net cash position of Rs 160/share.

Two years later: New hatchback brings back market share

The A-Star fills the gap between the Zen Estilo and the Swift in Maruti’s product range. Given the marked distinction in the brand positioning between Maruti’s WagonR and the new A-Star, we believe the two products cater to different customer segments. Overall, we believe there will be minimal cannibalization into Maruti’s existing product portfolio. The A-Star is pitted against the Hyundai i10, which took the small car segment by storm following its launch in second half of 2007.

We expect Maruti to regain the market share lost to i10

Maruti launched the A-Star after a two-year period, during which time the company did not launch a single new model in the compact-car space. In that period, and especially after the launch of the Hyundai i10 in September 2007, Maruti lost 230bp of its market share in the A2 segment. This was the result of a combination of weak products – in its Zen Estilo – and the absence of a product to fill the gap between the Zen Estilo and the best-selling Swift.

We believe the launch of the A-Star and the impending launch of the Splash in Q1FY10 will help Maruti improve its position