Demand recovery, new launch hopes drive gains for Maruti Suzuki

Price hikes effective from July 1 could offset input cost pressures

The Maruti Suzuki (MSIL) stock gained over five per cent after the company announced price hikes across its portfolio to counter high input costs. The Street is also expecting passenger vehicle volumes to improve as the vaccination gathers pace and more states relax restrictions imposed after the second wave.

Even as the company had posted a strong top line growth in the March quarter, operating profit margins of the country’s largest passenger car maker were down 21 basis points to 8.3 per cent and were short of analyst estimates.

The current hike, which will be applicable from July 1, will be the third hike in as many quarters to offset the spike in steel and precious metals. The company, in the post results commentary had highlighted that further hikes would depend on demand momentum and volume trajectory. The price hike is an indication that demand could be coming back boosting its bookings and pending orders.

Lockdown and restrictions had impacted about 35 per cent of Maruti’s monthly volumes; the company posted a 71 per cent month on month decline in May volumes while the same was lower by 41 per cent compared to May, 2019. Analysts led by Raghunandhan N L of Emkay Research expect a strong recovery in passenger vehicle (PV) volumes due to easing of lockdowns, healthy order book and improving macros. Most analysts highlight that the PV segment is less impacted than the two wheelers as the pandemic has hit the lower income categories more than middle and upper income segments.

While demand improvement is positive, the key to sustaining sales and earnings growth for Maruti will be its ability to launch new products in the SUV segment and maintain market share. The company lost 320 bps market share YoY in FY21 to 47.8 per cent losing across most of its key states. Rivals Kia Motors and Tata Motors were the biggest gainers taking share from the market leader. Lack of new products especially in the SUV category has led to the decline in market share.

Analysts at JM Financial however believe that after a two year gap in FY20/21 marred by regulatory changes and Covid led disruption, a new product cycle will drive Maruti’s outperformance with respect to industry growth (domestic PV) and aid margin expansion similar to the previous product cycle.  In addition to a full model change for Baleno, Vitara Brezza, Celerio and Ciaz during FY22 and FY23, the company has lined up multiple SUVs to be launched over the next four years. Among the new launches are the Jimny off roader, a multipurpose vehicle in collaboration with Toyota, a mid-sized SUV and a sub-four metre crossover codenamed YTB.

FY22 could see sales growth for the first time in over two years; after a 14 per cent decline in FY20, revenues fell over 7 per cent last year. Analysts expect a 30 per cent increase in the top line in FY22 with overall sales expected to cross the Rs one-trillion mark in FY23.

Given the higher visibility in terms of demand recovery, strong competitive positioning, margin drivers, and balance sheet strength, the stock remains one of the top picks of Motilal Oswal Research. At the current price, MSIL is trading at 33 times its FY22 earnings estimates. While the company’s new product launch plans and price hikes should allay street’s concerns on market share and margins, investors should await concrete progress on these fronts before considering MSIL.