Weak product cycle may further dent Maruti’s market share

Commodity price rise, lower share of higher margin segment could worsen its margin profile

Since the highs it reached in January, the stock price of India’s largest passenger vehicle (PV) maker, Maruti Suzuki, has declined 17 per cent. Maruti has also underperformed its peer index and its benchmarks over the last six months, with returns of -3 per cent, while the BSE Auto index and the Sensex rose 19-21 per cent.

Investors are concerned that the company has lost over 400 basis points (bps) of market share since September and this trend could continue, given its weaker presence in high growth segments. The decline in Maruti’s market share is due to a 500 basis points dip in compact utility vehicle share which is growing at double digits even as the overall market is declining.

Analysts expect Maruti’s market share to decline further due to a weak model cycle in a segment that is expected to outperform. This is aggravated by rising competitive pressures and attractively priced launches of its peers.

Antique Stock Broking expects the share of utility vehicles (UVS) in domestic PVS, which has increased from 28 per cent in FY19 to 39 per cent in FY21, to hit the 45 per cent mark in FY23.

While Maruti dominates other segments with a share of 65 per cent, its share in UVS is 22 per cent. Say Amit Mishra and Udaykiran Paluri of Antique, “Based on our expectations of new model launches by various manufacturers in the industry, we expect MSIL’S domestic PV market share to decline from 48 per cent in FY21 to 45 per cent in FY23.”

Given a lower share of this higher margin segment and rising commodity prices, Maruti’s margins would continue to be under pressure despite the price hikes it has announced. Highlighting this issue, CLSA’S Amyn Pirani says in Q3 the company operated at full capacity (volumes up 13 per cent year-on-year), but the operating profit per vehicle was flat.

The company has indicated that it will not be able to fully offset the commodity pressures. Any increase in marketing costs and moves by the company to give priority to market share could worsen the margin profile of the company.

Though the correction in the stock price has brought valuations close to its 10-year averages, market share and margins will continue to weigh on stock price.