Maruti: Premium vehicles to boost volumes, margins

Company expected to outperform sector in FY16, on the back of new launches in key segments

Product launches in the current financial year (FY16) and traction in recent launches could boost Maruti Suzuki’s market share and margins. While the continuing shift to petrol vehicles will improve volumes, customer shift towards the premium hatchback segment could help margins.

According to UBS’ Sonal Gupta, Maruti is best placed to capture pent demand in the passenger vehicle segment driven by a strong pipeline, moderating competitive intensity and potential for discount reduction. Reduction of discounts, near all-time highs of 5.6 per cent of average selling price, will drive realisations and, hence, margins.

Ambit analysts say the moderation of discount levels, along with favourable currency movements, would drive up margins by 270 basis points by FY17, from the estimated 12.8 per cent in FY15. With rising volumes, margin gains should mean a much stronger rise in net profit.

Launch of the Ciaz is expected to help Maruti gain traction in the premium sedan segment, where it has traditionally been a smaller player. The company, which had lost some market share in the overall sedan market, is expected to recover some of the losses in market share (currently 37-38 per cent) given Ciaz’s run rate of 5,000 units a month. Sedan sales for the firm were up 21 per cent in FY15.

Among compact sports utility vehicles (SUVs), fastest growing segment within utility vehicles, the Ertiga and Gypsy sold 50,000 units for the period April to December in FY15, with a market share of 32 per cent. Aditya Makharia of JPMorgan believes within passenger cars, crossover vehicles are expected to drive sales, with multiple  launches lined up. Given the importance of the segment, Maruti Suzuki has lined up a crossover (SX4 S-Cross) and a mini sports utility vehicle in FY16. Besides, it might enter the light commercial vehicle market and will be launching a model in the current financial year.

While the company reported higher volumes for FY15 on the back of new launches, the mini segment (Alto, WagonR) saw a 2.4 per cent fall. Given the Alto K10 facelift in November last year, analysts believe volumes in the segment should look up. The K10 accounts for a third of Alto volumes and an urban uptick could boost volumes in this segment. Maruti has consolidated its market share in the segment at 60 per cent.

The compact segment (Swift, Ritz, Celerio, Dzire), however, continues to see traction, owing to the Celerio launch with sales, from the portfolio up 12.6 per cent. Except for March, the company outperformed the sector. Maruti, which has grown  11 per cent in FY15 (versus the industry’s four per cent growth), has indicated it will grow faster than the industry in FY16 with sales growth of five-six per cent.  About 80 per cent of analysts covering the stock have a ‘buy’ on it with a target price of Rs  4,100, which on the current market price indicates a 12.5 per cent return.