Despite volume uptick, Maruti's rally may fizzle out on multiple headwinds

Competitive pressures, lower share of utility vehicle segment and margins are key worries

Recovery in volumes over the past three months has put the stock of India’s largest passenger vehicle (PV) maker Maruti Suzuki India (MSIL) on an upward trend.

The stock has recovered 79 per cent from its lows in April, but about a third of those gains have come in the past three months. At current levels it is just 7 per cent shy of its 52-week highs.

Led by the entry-level segment, the steadily increasing wholesale volumes have been the key trigger. In August, the company posted a 15-17 per cent growth over July and the year-ago period to 124,000 units. The robust growth was on account of demand for the mini segment (comprising Alto and S-Presso), preference for personal mobility, unlocking guidelines, and restocking of inventory at dealerships ahead of the festive season. 

 

 

A lower base last year — S-Presso was launched in September — helped mini segment sales grow 95 per cent year-on-year (YoY). This, coupled with a 14 per cent gain in the compact segment, led to overall PV sales growth of 21 per cent in August. What has aided the firm is the fact that a third of its sales comes from the rural segment, which has been lesser affected by the Covid-19 pandemic. 

Despite the recent volume uptick, Priya Ranjan of Antique Stock Broking believes the optimism behind the rally is likely to fizzle out. He cites two reasons for this. The first is the rising share of utility vehicles in industry volumes with Maruti being a weak player, and increasing competition from Tata Motors and Renault in its core hatchback portfolio. Despite a 70 per cent share in the entry-level segment (customers are downtrading to lower priced cars), the company’s retail market share has been at the 50-per cent mark over the past two months. 

 

 

Moreover, the reasons for Maruti’s stock gains over the last few years — such as market share increase, premiumisation, margin expansion, and valuation re-rating — might not play out going ahead.

Macquarie Research highlights that premiumisation has been lower in the last three years than historical levels. The other challenges include heavy dependence on Baleno, which accounts for 70 per cent of Nexa channel volumes, and lack of a diesel option in the mid-to-large sports utility vehicle segments and vehicles used for commercial applications. MSIL’s utility vehicle market share is 25-30 per cent.

Given the lower volumes, operating profit margins have been under pressure. This is likely to continue because of higher share of the entry-level segment, discounts, and rising raw material prices. Antique estimates MSIL’s operating profit (earnings before interest and taxes) margin to remain in 6-7 per cent range for the next three years.