Not surprisingly, the Street has punished the stock. Maruti Suzuki shares are down 34% from the 52-week high of ₹9,929. The one-year forward price-earnings multiple fell from a steep 30-32 times a year ago to 23, which happens to be the five-year average for the stock.
Analysts’ latest worry is the implications of the Toyota-Suzuki tie-up for Maruti Suzuki, which will gain from Toyota’s technological expertise in hybrid and electric vehicles, without having to spend on development costs.
But what about the flip side, where Suzuki has agreed to cross-badging of vehicles? Maruti Suzuki will share 25-30% of its products by volumes with Toyota (see chart) in this cross-badging exercise. The company’s premium sedan Baleno, which accounts for about a fifth of total sales volumes, will also roll out with the Toyota badge in the next few months. This is not all. Other premium vehicles in Maruti Suzuki’s basket such as Ciaz and Vitara Brezza will also come under the grand alliance.
In return, the company will launch Toyota’s Corolla about a year from now, which may push sales volumes for Maruti Suzuki, riding on Corolla’s brand equity.
The moot question, however, is if the Toyota-Suzuki partnership will cannibalize sales of Maruti Suzuki’s premium products. Under cross-badging, companies come together to sell a vehicle under different brand names, with some small cosmetic changes. Developmental costs of new models are minimized while brand identity is also retained.
However, past experience hasn’t been very encouraging. Collaborations of Nissan-Renault, Volkswagen-Skoda and some others have not fared well in India. “It will lead to loss of volumes of the entire premium segment range at Maruti, thereby arresting its volume growth," according to a report by ICICI Securities Ltd. What Toyota is bringing to the table is of limited benefit to Maruti Suzuki, said the report.
Unlike in mature markets where brand loyalty is high, India’s passenger vehicle market is still evolving. Consumers are lured by price, value for money and fuel efficiency rather than brand loyalty. This is why the risk-reward equation of this collaboration doesn’t look great for Maruti Suzuki at this juncture.
“Access to Toyota’s technology will be key to future-proof Maruti’s long-term prospects, particularly in the electric vehicles segment. However, quid pro quo will inevitably mean concessions by Maruti, Suzuki’s crown jewel, in various forms, which investors need to factor," said a report by Jefferies India Pvt. Ltd.