Maruti: Robust product portfolio to power volumes and profits

Strong growth, led by demand recovery, entry into new segments and uptick in margins, should double net profit by FY17

A spurt in volumes in August, expectations of new launches ahead of the festival season and market share gains have helped the Maruti Suzuki stock to gain five per cent in two trading sessions. Analysts are bullish on Maruti and expect its volumes to grow by 16 per cent in the current financial year, more than double the estimated six per cent growth for the sector.

This expectation follows its 27 per cent growth in August and 17.2 per cent growth in the year to date. The August growth largely came from the domestic market, sales of which grew 29 per cent (aided by the compact segment of the Swift, Celerio and Ritz brands) as against analyst expectations of 24 per cent. Things could be turning around for the passenger vehicle (PV) sector (cars, utility vehicles, vans). It has had three years of sluggish volume growth -- 2011-13 had only two to five cent more and FY14 reported a decline (a first in 14 years) of six per cent.

Analysts at Motilal Oswal Securities believe Maruti is well positioned to benefit from demand recovery, aided by an improvement in consumer sentiment and higher incomes. The return of first-time buyers and the company’s significant exposure to the entry and mid-level car segments will help. And, with the petrol and diesel price differential narrowing, Maruti, with a larger portfolio of petrol-driven cars compared to peers, stands to gain. Its overall share in the PV market is 42 per cent and in the entry-level segment is a bit over 75 per cent.

Improvement in product mix (premiumisation) and its impact on margins is the other trigger. The company is set to launch a premium sedan, Ciaz, this month and a compact sports utility vehicle in the March quarter of 2015. Analysts expect a 150-200 basis points (bps) improvement in margins from the current 12 per cent on higher realisations, localised content, lower discounts (as demand picks up) and scale gains (with volumes picking up).

Most analysts expect volume gains from existing products, margin improvement and new launches in laggard categories such as sedans and high growth segments like compact utility vehicles (UV) will help the company double its net profit over FY14-17. Given the positive sentiment around the stock, most brokerages have a 'buy' recommendation on it, with an average target price of Rs 3,500, an upside of 20 per cent from current levels. But, as it is up 48 per cent in the financial year till now, a correction could provide a good entry point.

In addition to increasing its dealer outlets and spreading the distribution reach, one area that has helped Maruti outmatch rivals is rural penetration. Sales from rural areas have more than tripled to 32 per cent of domestic volumes over the past five years (23 per cent annual growth), as compared to a 1.5 per cent average annual growth for urban sales. In fact, it was rural sales growth (up 16 per cent year-on-year) which was a major contributor to growth in FY14, with overall revenue and volume growth coming below one per cent. The success of its compact and super compact segment, coupled with higher rural sales, helped Maruti gain 500 bps in passenger car market share in the past 18 months, with a 200-bps gain this financial year, taking its share to 51 per cent. The Dzire and Swift nodels contribute 40 per cent to revenue, showing double-digit growth.

Going ahead, entry into segments such as mid-level sedans, compact UV and light commercial vehicles (LCV), where it is not present or is weak, is expected to boost volumes and market share. The premium sedan and UV segment accounts for about 25 per cent of industry volumes, as against only seven per cent of Maruti’s. Further, analysts at Emkay believe even a five per cent market share in the 35,000 units a month LCV market could mean an incremental two per cent volume growth in this financial year. Analysts believe over the next two years, contribution to revenue from new launches will be higher than the current leader, the Dzire, which contributes 20-25 per cent.

A key risk, though, is whether Maruti will be able to pull it off this time, as some past launches in the sedan segment (like the Baleno, SX4 and Kizashi), did not make significant inroads.