Weak product cycle could lead to further market share loss for Maruti

Higher commodity prices could worsen its margin profile

Since its highs in January, the stock price of India’s largest passenger vehicle (PV) maker has slid 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 are up 19-21 per cent during this period. Investors are concerned that the company has lost over 400 basis points market share since September and this trend would 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 its market share to decline further due to a weak model cycle in a segment which is expected to outperform. This is aggravated by rising competitive pressures and new launches in this segment at attractive prices by peers. Antique Stock Broking expects the share of 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 the other segments with a share of 65 per cent, its share in utility vehicles 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 points out that in Q3FY21 the company operated at full capacity (volumes up 13 per cent y-o-y) 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 prices going ahead.