Strong product portfolio likely to keep Maruti Suzuki in growth lane

Near-term demand momentum expected to be driven by CNG/utility vehicle segment

Shares of Maruti Suzuki India (MSIL) hit a record intraday high of Rs 13,675 on the BSE on Thursday. Maruti Suzuki India shares gained 4 per cent in the intraday trade after it reported strong June quarter (Q1FY25) results. The stock, however, gave up some of the gains to end at Rs 13,349, up 1.4 per cent. 

Beating Street estimates, MSIL, India's largest car manufacturer, reported a 46.9 per cent year-on-year (Y-o-Y) increase in its consolidated net profit at Rs 3,649.90 crore for Q1FY25, primarily on the back of strategic cost reductions, favourable commodity prices, and advantageous foreign exchange conditions.

Sales volume for the quarter stood at 5.22 lakh units, up 4.8 per cent Y-o-Y. It was, however, down 10.6 per cent on a quarter-on-quarter (QoQ) basis. Net sales for Q1FY25 were up 9.8 per cent Y-o-Y to Rs 33,875 crore. Earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins for the quarter came at 12.7 per cent, up 42 basis points (bps) Q-o-Q. The margin improvement was on the back of lower manufacturing and administrative expenses, favourable foreign exchange movement and lower commodity prices, and higher operating income.

The management said margins were expected to remain at similar levels going forward, adjusted for some currency headwinds. The management's guidance for overall growth, however, was tepid on a high base with structural drivers intact for long term sustainable growth rate for the industry.

"Margins for the quarter were strong driven by tailwinds from material costs and forex. But most of these benefits are in the base now. We see tougher demand conditions – signs of rising inventory and discounts. This can pose a risk to the sustainability of these margins," analysts at Nomura said.

"Given new launches from competition, Maruti Suzuki India's market share over FY25-26 is at risk and a stronger push for growth is required," it added with a 'neutral' rating on the stock.

ICICI Securities said in a note that with MSIL lagging peers in terms of technology prowess on the electrification side, they have a 'neutral' view on the stock (see limited upside) despite it trading in tandem with its long period price to earnings multiples of Rs 25 times on forward basis.

Maruti Suzuki India, with back-to-back SUV launches, has strengthened its presence in the B-segment (regained leadership position with a 28 per cent market share). The company plans multiple new launches (over 10) in the next 6-7 years (including 6 new electric vehicles and Hybrid models).

The near-term demand momentum is expected to be driven by the CNG/utility vehicle portfolio. The benefit of a richer portfolio mix and higher operating leverage is expected to support margins going ahead, said analysts at JM Financial Institutional Securities. The brokerage firm maintains a 'buy' rating on the stock with a target price of Rs 15,000.

Motilal Oswal Financial Services (MOFSL), meanwhile, expects MSIL to continue to outperform industry growth over FY25-26. While the bulk of input cost benefits are likely to be over, the brokerage firm expects MSIL to post a 90 basis points margin improvement to 12.5 per cent in FY25, largely led by an improved mix. This would in turn drive a steady 15 per cent annual earnings growth over FY24-26.

Any GST cut or favourable policy for hybrids by the government may drive a rerating as MSIL would be the key beneficiary, MOFSL said.