Maruti Suzuki's margins may slip further on higher commodity costs

Demand trajectory, market share losses are other concerns

The sharp rise in commodity costs dented Maruti Suzuki’s operational performance in the March quarter (Q4). Though revenue growth was up 32 per cent on the back of a lower base and 32 per cent rise in average selling prices, operating profit margin at 8.3 per cent was down 21 basis points (bps) as compared to the year-ago quarter. Reported margins were short of the Street’s 9-10 per cent estimate.
 
The company highlighted that commodity prices, especially of steel and precious metals, have seen a sharp spike. Cost reduction efforts and a price hike of just under 1 per cent in the quarter was not enough to overcome the impact of this input cost surge.
 
While Maruti announced another hike in the current quarter, given the commodity price uptrend, the management believes that margins would be volatile in the first half of FY22. Further hikes would depend on demand momentum and volume trajectory.
 

The company indicated that fresh bookings and pending orders remain healthy. However, the states where restrictions have been imposed account for 35 per cent of Maruti’s monthly volumes and could hit demand in the near term.
 
The rural segment remains resilient with its share of Maruti’s sales going up to 41 per cent now, compared with 38.5 per cent earlier. With the expectation of a normal monsoon following a strong rabi season, demand trends in the rural segment are expected to stay healthy.
 
In addition to volumes and margin woes, the Street will also track the market share movement. Maruti has lost over 300 bps market share over the last year with its share now under 50 per cent due to the lack of new launches and weaker presence in the higher growth sports utility vehicle segment.
 
Though the stock has corrected over 20 per cent since its highs in January, the multiple headwinds on account of demand and competitive pressures will keep it under pressure in the near term. Investors should await sustained volume and margin improvement before considering the stock.