Product launch success key for Maruti Suzuki to sustain stock rally

A strong Q3, order book and easing chip availability situation to support sentiment

A healthy performance in the December quarter, a robust order book, and an improving situation on the semiconductor front may help sustain the rally in the stock of India’s largest carmaker Maruti Suzuki. Market share gains on the back of product launches can also act as a trigger.

The stock hit its 52-week highs on Tuesday before closing the session with gains of just under 7 per cent. While the supply of chips continues to be a headwind, the company indicated the situation in the current quarter will be better than Q3 when the production loss on account of that was 90,000 units.

The company ended Q3 with volumes of 430,000 units -- 13 per cent lower YoY but up 13.5 per cent on a sequential basis. Despite the drop in volumes YoY, revenues were at year-ago levels as realisations led by price hikes, as well as improving product mix neutralised the same. The company ended CY21 with record export volumes.

In addition to easing semiconductor issues in Q4, the company highlighted that its order backlog has increased over the past three weeks to 264,000 units; favourable tailwinds for demand are financing availability and lower interest rates.

The margin performance in the quarter at 6.7 per cent (up 250 basis points QoQ) was 20-40 basis points above Street estimates. This was aided by cost-control efforts, as well as higher operating leverage. There has been an easing of commodity costs, especially related to precious metals.

While steel prices have increased, the company is hopeful of a reduction in the same. The company is looking at price increases (average increase of 2 per cent in January) and cos-control measures (raw material/other cost items) to counter higher input costs.

While Q3 results and management commentary was positive, the key trigger for the stock will remain fresh product launches and its ability to improve its market share. The company has lost 490 basis points YTD in FY22 with the current retail share in passenger vehicles at 44 per cent.

Though there are multiple triggers for the stock, given the semiconductor issue, near-term worries on the demand front due to the Omicron spread, and price run-up, investors should await a better entry point.