Maruti Suzuki is banking on new launches, exports and the rural markets to improve its performance and keep competition at bay.
At Rs 3.99 lakh to Rs 4.99 lakh, Ritz is priced around the Hyundai i10 even though it has slightly larger dimensions and better interior room.
Maruti already has 58 per cent market share in the A2 segment with models such as the Alto, Wagon-R, Zen, Swift and the A-Star. These models helped the company to sell about 800,000 units and achieve a volume growth of 3.6 per cent y-o-y in FY 2008-09. Ritz is expected to stretch the lead further.
Analysts expect Maruti to improve its performance in the current financial year through higher exports of A-star, stronger sales of Swift and a pick-up in sales in the rural market.
While the grim macroeconomic situation continues to weigh on the prospects of Maruti and other auto makers, the small car king has been able to escape the downturn effects largely due to the surge in sales to government employees and the rural sector.
These two user segments contributed nearly a quarter (200,000 units) of the sales volume for FY 2008-09. The share of government employees in total sales trebled from 5 per cent in FY08 to about 15 per cent in FY09.
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The management believes that the Pay Commission recommendations are yet to be implemented in positive number of government departments, so the impact will continue for another year.
In the rural market, the company has more than doubled its share of sales from 3.5 per cent to 8 per cent in FY08-09. With a near-normal monsoon expected this year and the company planning to expand its 681-strong dealer network into smaller towns, the rural segment is likely to boost its sales volumes in FY09-10.
Higher borrowing costs and stricter lending norms had adversely affected demand last year in India and car sales fell in six of the 12 months during the financial year ended March 31. But, various steps taken by the government to boost lending in a slowing economy as well as the introduction of new vehicles by auto makers such as Maruti led to a third straight increase in monthly car sales in April.
Europe beckons
Despite the tough economic environment in foreign markets, exports have seen a steady climb for Maruti. The company saw exports jump 32 per cent y-o-y to over 70,000 units in FY 2008-09.
The auto major will be depending on A-Star, which clocked sales of 19,000 units in FY 08-09 to help it achieve its export target of 120,000 units in FY 09-10. While Nissan is expected to pick up 30,000 units, the rest will be sold in the key markets of Germany, France, the UK, Italy and Belgium.
Costly inputs
While net sales were up 14 per cent in FY08-09 on higher volumes, the company's operating margins have been on the decline over the past four quarters, dropping over 400 basis points to 7 per cent in the March quarter.
Despite improving realisations due to a higher proportion of top-end models, margins dropped significantly because of a higher import content of these models, an appreciating yen, royalty payments and forex hedging losses.
The management has indicated that it is looking at localisation of parts imported by vendors to bring down its exposure to forex fluctuations . The company will also benefit from the dip in raw material costs in the June quarter of FY09-10. For example, as much as 95 per cent of the components for Ritz will be sourced locally.
Though the company has maintained that increasing exports will help it counter some of the costly yen imports, it will still have to contend with the high cost of imports of its vendors.
Import costs constitute 22 per cent of sales, with vendors' share at about 10 per cent. Analysts, however, estimate that margins should improve by about 200 basis points to 9 per cent in FY10 on easing raw material costs, indigenisation and corrective measures on the forex front.
Tackling competition
Maruti is facing tough competition from Tata Motors, Hyundai and Chevrolet in the 80,000-units-a-month A2 segment. While Tata Motors is the largest player in the diesel segment, Hyundai, with its i10 and Santro and premium hatchbacks i20 and Getz, accounts for a quarter of the A2 segment in the domestic market.
The i10 alone accounts for half of Hyundai's domestic sales of 23,000 units a month. The steady increase in sales of Chevrolet's Spark at the lower end and Aveo U-VA at the upper end, is making the competitive landscape tougher for Maruti.
The 200,000 bookings for the Nano could also be a threat to the Maruti 800, which is the only sub-Rs 2 lakh car in the Indian market and contributes about 6 per cent to Maruti's volumes. If Maruti is able to upgrade the car to meet the BS-4 norms which will come into effect by April 2010, the top end of the Nano could well eat into the basic 800 version, which costs about Rs 1.9 lakh.
Expensive scrip
Poor demand and lack of retail finance availability have been the biggest headaches for the auto sector as well as Maruti Suzuki.
While consumer sentiment on discretionary spends such as cars continues to be a concern, resumption of funding by public sector banks, lower cost of ownership (lower interest rates and fuel costs) and sales to the rural sector and government employees are positives for the company.
Apart from its dominant position, easing commodity prices and higher sales from new models make the prospects for the Maruti stock look good, going ahead.
However, at Rs 837, the stock is trading at a slightly expensive 16 times its FY09-10 earnings estimate of Rs 53, given that it has historically traded at 14.2 times its one-year forward earnings.