Market share and margins to take the wheel for Maruti Suzuki India

Volume trajectory to hit the accelerator powered by festival season sales

A robust performance in the July-September quarter for Maruti Suzuki India, driven by strong volume growth during the ongoing festival season and market share gains, is expected to keep the stock of the country’s largest passenger vehicle (PV) maker on an upward trajectory.

The stock has gained over 4 per cent from its lows on October 4, while the S&P BSE Sensex is down 2 per cent during this period. Over the medium term, new launches (market share gains) and margin improvement, driven by pricing and cost savings, will be the key factors boosting revenues and profits for the market leader.

The company’s operating performance in the July-September quarter surpassed Street profit estimates. Lower raw material costs led to a 73 per cent increase in operating profit to Rs 4,780 crore, which was well above estimates.

Despite discounts rising by 28 per cent year-on-year (Y-o-Y) to just under Rs 17,800 per unit, raw material costs as a proportion of sales decreased by 250 basis points (bps) to 70.6 per cent.
 

Lower raw material costs, combined with an improved product mix, resulted in gross margin gains of 250 bps on a Y-o-Y basis and 220 bps on a sequential basis.

The share of higher-margin utility vehicle (UV) sales increased from 29 per cent in the first quarter (Q1) of 2023-24 (FY24) to 37 per cent in the second quarter (Q2) of FY24, up from 21 per cent in the year-ago quarter.

Higher operating leverage and favourable foreign exchange movements expanded operating-level margins by 370 bps to 12.9 per cent.

The company indicated that a sharp decline in the prices of precious metals significantly contributed to the sequential expansion of operating profit margins. While some of these gains will continue into the current quarter, they may be offset by rising steel prices.

SMIFS Research anticipates an operating profit margin of 12.7 per cent for the next two quarters, as most of the order backlog of 288,000 units consists of higher-margin sport utility vehicles (SUVs), and there has been a slight increase in commodity costs.

Going forward, volume growth will be a key driver for the stock.

In the company’s July-September quarter, revenue growth of 24 per cent comprised a 7 per cent increase in volumes, while realisations were up by 16 per cent. The company expects a robust 18 per cent Y-o-Y volume growth in the current festival season, with an industry growth expectation of 5-7 per cent for FY24. The company is expected to outperform with volume growth of 10 per cent, and realisations should be even higher given the improved product mix.

The stability on the supply side, with Q2 being the first quarter without production losses in nine quarters, has aided the company in reducing the order book from 355,000 units in Q1FY24 to 288,000 units in Q2, and it currently stands at 250,000 units.

Nuvama Research expects revenue to grow by 12 per cent from 2022–23 (FY23) through 2025–26 (FY26), driven by modest car growth and robust growth in SUVs. Net profit growth over this period is projected to be 24 per cent due to margin gains boosted by better net pricing and cost savings.

Raghunandhan N L of the brokerage expects the company’s market share to recover to 45 per cent in FY26 (up from 43 per cent in FY23), driven by a series of new SUVs catering to four key consumer profiles: entry SUV customers, upgraders, offroading enthusiasts, and premium SUV customers.

A significant portion of the 200-bps overall market share gains will come from increased UV market share, rising from 19 per cent in FY23 to 30 per cent in FY26. In the UV segment, the company received a strong response to the Grand Vitara, Fronx, Jimny, and Invicto.

Motilal Oswal Research also anticipates stable growth in domestic PVs and a favourable product lifecycle to support Maruti Suzuki.

“We expect market share gains and margin recovery in FY24 compared to FY23, fuelled by improved supplies, a favourable product lifecycle, a healthy product mix, and operating leverage,” said analysts at the brokerage, led by Jinesh Gandhi.