Supply crisis, market share loss in SUV put Maruti's stock under pressure

Margin improvement for market leader in passenger vehicles may take time, say analysts.

Maruti Suzuki India’s stock hit highs in mid-November, but now has lost a fourth of its value due to the company losing market share, supply disruptions and pressure on profitability. Brokerages believe there are no near-term triggers for India’s largest passenger vehicle maker to reverse the downward trend. 

CLSA downgraded the stock to "underperform", given that the company was losing market share in the lucrative sports utility vehicle (SUV) segment. The company hasn’t had new launches in the segment, prompting analysts to expect volumes and margins to be under pressure with further downgrades in FY23 and FY24.

From 48.1 per cent in the first half of FY21, Maruti’s market share has slipped to under 43 per cent in the first half of FY22. It has lost business in most other segments, the lack of new products in the compact SUV segment being another key reason for that.

The domestic compact SUV is the industry’s fastest-growing segment: its share increasing to over 32 per cent from 25 per cent over the year ago quarter. Maruti has lost 90 basis points market share in H1FY22 to 14.4 per cent in this segment. At its peak in FY2019, the company’s share was 35.4 per cent. 

Aside SUVs, Maruti’s share in the bread-and butter-hatchback segment (as a proportion of domestic passenger vehicle market) is down 700 basis points y-o-y to 39.8 per cent.

Sales in the domestic market in November were down 18 per cent and could stay muted in the near term given the 15 per cent production cut in December due to the computer chip shortage that’s hurting industries. 

While volumes have been low, demand according to the company has been strong. The company has a pending order book of 200,000 units (385,000 retail sales in Q2) and dealer inventory of 60,000 units. A positive trend is the company share of CNG which has increased from 12 per cent last year to over 17 per cent currently. Improving CNG infrastructure and lower running costs is leading to higher demand for these vehicles which is positive for the market leader.

The key trigger for the stock is the launch of SUVs next year. In order to fill the product gaps in its portfolio the company is aiming to launch 10 products over the next three years years and this will include two SUVs and a multipurpose vehicle in partnership with Toyota. 

While the launches from the market leader will have to be significant with class leading features, Deep Shah of YES Securities points out that aggressive product line‐up even from competition like Tata Motors, Kia, MG and Mahindra & Mahindra would limit market share gains.

While in the near term demand, margins (down 600 basis points y-o-y in Q2 to 4.2 per cent) and market share would be key factors, in the medium to long term, the street would keep an eye on the company’s rollout of hybrids and electric vehicles (EV). As competitors launch electric vehicles and the global market shifts to battery-powered vehicles, Maruti is at the sideline. ICICI Securities believes Maruti’s inertia is a key risk. 

While there are headwinds and the stock has underperformed its peer index over the past year, valuations are at a discount to five year averages. Ashish Chaturmohta, director, research at Sanctum Wealth, said investors are getting a market leader like Maruti at reasonable valuations. However, given the multiple concerns, investors should await key triggers (such as new launches) to play out before considering the stock.