Near-term worries likely to keep Maruti Suzuki's stock under strain

Market-share loss in SUVs, supply disruptions, and margin improvement may take time to repair

From its highs in mid-November, the stock of the country’s largest passenger vehicle (PV) maker - Maruti Suzuki India (MSIL) - has shed around 12 per cent of its value. Downward trend in market share, supply disruptions, and pressure on profitability led to a derating of the stock. Further, brokerages believe there are no near-term triggers for the company to reverse the downward trend.

Recently, CLSA had downgraded the stock to underperform, given that the company was losing market share in the highly profitable sport utility vehicle (SUV) segment. The losses are due to an absence of launches in the SUV segment; they expect volumes and margins to be under pressure, with further downgrades in 2022-23 and 2023-24.

From 48.1 per cent in the first half (H1) of 2020-21, the company’s market share has slipped to under 43 per cent in H1 of 2021-22 (FY22). While it has lost share in most other segments, the dearth of new products in the compact SUV segment has been the key reason for most of the share loss.

The domestic compact SUV is by far the fastest-growing segment, with its share increasing to over 32 per cent, from 25 per cent, over the year-ago quarter. MSIL has lost 90-basis points (bps) market share in H1FY22 to 14.4 per cent in this segment; at its peak in 2018-19, the company’s share in this segment was at 35.4 per cent.

In addition, the share of MSIL’s bread-and-butter hatchback segment (as a proportion of the domestic PV market) is down 700 bps year-on-year (YoY) to 39.8 per cent.

Sales in the domestic market in November were down 18 per cent and could be muted in the near term, given that the 15-per cent production cut in the current month is due to chip shortage.

While volumes have been low, demand, according to the company, has been robust. The company has a pending order book of 200,000 units (385,000 retail sales in the second quarter, or Q2) and a dealer inventory of 60,000 units.

A positive trend is the company's share of compressed natural gas (CNG), which has increased from 12 per cent last year to over 17 per cent at present. Improving CNG infrastructure and lower running costs are leading to higher demand for these vehicles - a positive for the market leader. 

A key trigger for the stock is the launch of SUVs next year. In order to fill the product gaps in its portfolio, the company is aiming to launch 10 products over the next three years - these will include two SUVs and a multipurpose vehicle in partnership with Toyota.

While the launches from the market leader will have to be significant with class-leading features, Deep Shah of YES Securities points out that an aggressive product line‐up, even from competition like Tata Motors, Kia, MG, and Mahindra & Mahindra, would limit market-share gains.

While in the near term, demand, margins (down 600 bps YoY in Q2 to 4.2 per cent), and market share would be key factors, in the medium- to long-term, the Street would keep an eye on the company’s roll-out of hybrids (to be launched next year) and electric vehicles (EVs).

Even as competitors are launching EVs and, globally, the market is structurally moving towards battery-powered vehicles, MSIL has been on the sidelines. The company recently indicated it would launch an EV in collaboration with Toyota by late-2024 or early-2025. ICICI Securities believes the market leader’s inertia against a proactive pivot towards EVs remains a key risk.

While there are headwinds and the stock has underperformed its peer index over the past year, valuations are at a discount to five-year averages.

Ashish Chaturmohta, director, research, Sanctum Wealth, believes investors are getting a market leader at reasonable valuations. However, given the multiple concerns, investors should wait for key triggers (such as new launches) to play out before considering the stock.