Volumes, margins to drive gains for Maruti Suzuki

Brokerages expect recovery in H2, aided by easing commodity/supply concerns

The growth outlook for India’s largest passenger carmaker — Maruti Suzuki India (MSIL) — is turning the corner. While robust volumes and price hikes will drive revenue growth, moderating commodity prices and improving leverage are expected to rub off on its operating profit margins.

Brokerages have tweaked their volume growth and earnings estimates upwards after the Januarymarch quarter results (2021-22, or FY22) to incorporate favourable trends for the market leader.

In addition to the outlook, valuations are below the long-term average, the 14 per cent increase in its stock prices since the lows in March notwithstanding.

While supply disruption has led to loss in production, demand trends remain strong, aided by new product launches as reflected in the order book — rising over the past few months. The order book is now at 320,000 units, compared with 240,000 in December 2021.

Since November 2021, the carmaker has launched a raft of updated and refreshed products — the Baleno, Celerio, Wagonr, Dzire compressed natural gas (CNG), Ertiga, and more recently, the XL6.

The demand for CNG vehicles continues to be sturdy, with over 40 per cent of MSIL’S bookings coming from this segment. The company has five cars offering CNG.

While these launches are encouraging, what the Street will be eyeing is new products in the sport utility vehicle (Suv)/multipurpose segment, whose share in the overall car market (currently at 38 per cent) continues to climb.

MSIL is expected to launch four new models in this space over calendar years 2022 and 2023, bolstering the current portfolio encompassing the Brezza, Ertiga, XL6, and the S-cross.

The success of these new launches is critical, given that the company’s share in the domestic car market has slid from a peak of 54.4 per cent two years ago to 44.8 per cent now. Faster growth in the SUV segment (where it lags behind competition) and declining share of the entry-level segment (which it dominates) have led to the fall in share.

The company’s Chairman R C Bhargava in a post-results call said that government regulations, taxes, and higher running costs have squeezed the entry-level segment.

“There is no butter left in the small car market, which used to be our bread-and-butter segment,” he quipped.

Brokerages, however, have a mixed view on the ability of the company to regain share, given its late entry into this heavily competitive space.

Aniket Mhatre and Sonaal Sharma of HDFC Securities expect the company to be a key beneficiary of gradual recovery in the economy and regain share, given the strong pipeline in utility vehicles (UVS).

“We believe that concerns over market-share loss in UVS are overstated, as MSIL has often proved its mettle in the past, and we expect it to bounce back this time as well,” they add.

However, Axis Capital analysts, led by Nishit Jalan, argue that the market leader is unlikely to repeat the success of 2011-12 through 2016-17, when it was able to capitalise on relatively new segments with limited competition. The reasons, according to them, are that late entry into a highlycompetitive and ‘aspirational’ SUV segment will pose challenges, especially given its positioning as a value brand. Even its existing strongholds will face incremental headwinds, driving further market-share loss over the next three years.

Higher volumes, especially in the profitable SUV segment, are critical as they can improve realisations and profitability. A lot will, however, depend on the trajectory of commodity prices, as well as semiconductor supplies. The company had a production loss of 270,000 units due to supply disruptions in FY22.

Motilal Oswal Research expects recovery in the second half of 2022-23 (FY23). Say analysts, led by Jinesh Gandhi, of the brokerage, “Strong demand and favourable product lifecycle for MSIL augur well for market share and margin. We expect recovery in market share and margin in the second half of FY23, led by an improvement in supplies, favourable product lifecycle, mix, price action/cost-cutting, and operating leverage.”

The brokerage expects yen depreciation to dilute the impact of commodity prices over the next few quarters.

If recovery takes hold and the ongoing traction in the export segment continues, the company could report strong double-digit volume growth over the next few years. This, coupled with price hikes, stabilising metal prices, and operating leverage, could improve the company’s margins.

IDBI Capital expects the company to report all-time high profits in FY23 and 2023-24.

At the current price, the stock trades at a slight discount to its long-term average. The consensus target price of analysts at ~9,006 translates into a gain of 16.5 per cent from the current levels.

Investors can consider the stock on dips to gain from recovery, new product launches, and margin gains.