Margin pressures outweigh volumes, may keep Maruti Suzuki stock subdued

The company is cautious on passing on raw material cost hikes to protect volumes

Maruti Suzuki’s operating performance was sub-par in the December quarter (Q3), despite the robust growth in volumes.

With demand reviving, the country’s largest passenger vehicle maker registered 13 per cent year-on-year (YoY) and 26 per cent sequential growth in volumes.

While the growth in volumes came on the back of festival demand, higher rural segment contribution, and year-end sales, gains on the operating leverage front were nullified by a sharp jump in raw material costs. Operating profit margins were flat on a sequential basis and down 67 basis points YoY to about 9.5 per cent largely due to the 300-basis-point (bp) impact of the rise in raw material costs.

The automaker highlighted that the sharp rise in prices of precious metals and steel led to input cost pressure. Further, the company did not implement any price hike in the quarter, which would have helped mitigate the impact.

Though demand trend has been strong — with a pending order book of over 200,000 units and negligible inventory — the firm was cautious regarding the impact of a price hike during the peak season.

Though the company did effect price hikes in January, it may not be enough to match the uptick in raw material costs. While it is looking at ways to protect margins by improving cost efficiencies and reducing marketing costs, pressure on profitability is expected to remain in the near term.

What could help is the improvement in its product mix; share of the higher margin utility vehicles has reduced by 100 bps sequentially. The new launches in the segment including the Jimny — which is currently available only for the export market — could contribute to the margin mix.

The stock fell 3.6 per cent after the announcement of results. The management’s cautious outlook on the margin and price hike front could keep the stock, which has gained 21 per cent in the last six months, under pressure in the near term.

Though the Maruti Suzuki stock is trading at 28x its FY22 earnings estimates, investors should await progress on the margin recovery and pricing fronts, before considering the stock.