August sales growth at 26 per cent for the country’s largest passenger vehicle (PV) maker - Maruti Suzuki India (MSIL) - was marginally lower than Street estimates. Fewer production days and an ongoing supply disruption led to sequential volume caving in 6 per cent.
However, a cast-iron order book and exciting launches are expected to sustain the volume growth momentum in 2022-23 (FY23) for the PV sector - and the market leader. Most brokerages expect the sector to register growth upwards of 21 per cent for FY23.
While a healthy order book (currently at 380,000 units) and launches will keep volume growth resilient in the near term, some brokerages have a ‘sell’ rating, given market-share loss, profitability concerns, and absence of valuation comfort.
The ability of the market leader to recoup market share will be crucial to sustain stock gains. While MSIL’s volume growth year-to-date (YTD) - April to August - was 25 per cent, Mahindra & Mahindra (M&M) and Tata Motors outperformed, with domestic PV volume growth at 67 per cent and 83 per cent year-on-year, respectively.
After August volumes, Joseph George, equity research analyst, IIFL Research, estimates MSIL’s market share to be about 41 per cent - 250 basis points (bps) lower than the company’s 2021-22 (FY22) market share.
While Tata Motors has gained 200-bp market share versus FY22 levels, M&M’s ramp-up of utility vehicle (UV) volumes, too, has been significant, with 30,000 units monthly, compared with under 19,000 units in FY22, says the brokerage.
MSIL’s base is, however, much larger than its two listed peers. YTD FY23 domestic PV volumes of M&M and Tata Motors put together at about 358,000 units was slightly more than half of what the market leader despatched to its distribution network during that period.
One segment that will be critical to the company to gain share will be UVs. Even as the mini and compact segments, which account for a lion’s (70 per cent) share of MSIL’s domestic volumes, witnessed a decline of 11 per cent month-on-month, the UV portfolio (Brezza, Ertiga, and XL6) was up 15.7 per cent.
The company highlighted that the overall order book remains strong, with pending orders at just under 380,000, of which the new Brezza’s bookings are at 106,000. The company has shed about 800-bp market share YTD in the multipurpose/multi-utility vehicle segment (Ertiga and XL6), largely on account of the launch of the Kia Carens, which was a key beneficiary. In the sport utility vehicle (SUV) space, its loss YTD was 440 bps.
UV sales should improve, with a ramp-up in the production of existing models and commencement of despatches of the new Grand Vitara, according to research analysts, led by Raghunandhan N L, of Emkay Research.
How much traction the new model achieves will have a bearing on its share in the segment.
Say analysts, led by Sanjeev Prasad, of Kotak Institutional Equities Research, “We are not sure if MSIL can make a significant turnaround in the fast-growing SUV segment, where its performance has lagged behind peers.”
The brokerage points out that the SUV space has several players and may face an uphill challenge of regaining market share and profitability. Unlike peers, the company lacks multiple powertrain options.
While it has maintained market share in the entry-level segment, its progress, notwithstanding its fast-vanishing share in the overall car pie, will depend on recovery in the rural market and the festival season - both expected to be normal after a two-year hiatus.
Margin trajectory is another factor that will influence stock movement. The company’s operating profit margin in the April-June quarter at 7.2 per cent was down 140 bps sequentially and below consensus estimates. The decline was on account of higher raw material costs and rising marketing spends. Improving volumes in the run-up to the peak season, falling commodity costs, and an enhanced mix may help the leader gain profitability.
The stock is up 17 per cent since its June lows and currently trades at 35x its FY23 consensus earnings estimates, according to Bloomberg. Given that the stock factors in some of the volume/margin improvement, there is limited upside from these levels.