Despite volume gain, the car maker is likely to feel the heat due to higher competition and rising input costs.
While Maruti Suzuki (MSIL) registered a strong 28 per cent year-on-year sales volume growth for April-November, the company is facing headwinds in the form of new competition, higher raw material costs and constrained supply issues. Against a robust 27 per cent growth in sales in the first half of 2010-11, its net profits were down almost 8 per cent on a year-on-year basis. The country’s largest passenger car maker, which dominates the small car segment, could see competition intensify as Toyota has announced the launch of its Etios sedan at an attractive price with a hatchback version to follow in April 2011. Since the start of the year, competition in this crucial segment has increased with the launch of Ford Figo, Volkswagon Polo, General Motors’ Beat and, recently, Nissan’s Micra. Maruti’s ability to sustain market share and improve profitability will determine whether its stock will shine or continue to underperform the broader markets as has been the case in the recent months.
New competition
While Maruti has been able to regain quite a bit of its market share (it had lost over 130 basis points in market share sequentially to 41.5 per cent in the March 2010 quarter due to competition and capacity constraints) to about 48 per cent now, analysts believe the new launches from Toyota and Honda later in CY11 could make it tougher to maintain the share and increase prices. Given the pricing of the Etios (just under Rs 5 lakh), a Citi report says that Maruti’s Dzire and the SX4 which fetch MSIL (Maruti) about 15 per cent of revenues will be impacted. Further it believes the Etios hatchback, which will be launched in April 2011 at an attractive price point (Rs 4.3 lakh), could impact the Swift, which contributes about 14 per cent of the company’s revenues. Toyota’s pricing is part of its strategy to more than triple its market share to 10 per cent over the next five to seven years. Honda’s Brio, too, when it is launched towards the end of next year, could cut into Maruti’s share.
Maintaining market share
However, analysts, such as Ajay Shethiya at Centrum Broking, believe the new launches are expanding the market rather than leading to market share erosion for the existing players. He believes car makers are attracting buyers by creating a niche for themselves with unique features and aggressive pricing, thus helping expand the market. Despite intense competition, for the April-October period, Maruti’s domestic passenger car market share fell only 150-200 basis points (100 basis points is one percentage point) year-on-year to 48.2 per cent.
Says Vivek Mahajan, head of research at Aditya Birla Money, “Given the fact that the passenger vehicle segment is expected to grow 15 per cent every year, Maruti should benefit from a volume upsurge with a marginal market share loss. Maruti has been taking steps to keep its product stable fresh with the launch of new and updated models. Since the start of the year, the company with the launch of Eeco has been able to boost its C segment sales. In the A2 segment, the company launched BS-IV compliant Wagon R, Alto K-10 and five CNG models across segments.”
Margin pressures
The key concern area for Maruti is its Ebitda margins, which contracted about 200 basis points year-on-year to 10.7 in the September quarter on the back of higher input costs and royalty. Since the March 2010 quarter, royalty has jumped from 3.4 per cent to 5.3 per cent of sales. On the raw material front, both steel and copper prices have gone up 15 per cent, while rubber prices have doubled over the last year. While Maruti has indicated it will effect its third price hike this financial year in January 2011, analysts believe it will have to absorb a part of its costs if it wants to keep competition at bay. Higher raw material costs coupled with a strengthening yen could increase pressure on margins going ahead, unless Maruti can improve efficiencies by an equal proportion. Shinzo Nakanishi, MD, last month said, “We will keep up our efforts in localisation and cost reduction to protect and enhance our profit margins.”
Valuations
The Maruti stock is down 8 per cent over the last month due to the royalty issue, margin pressures and increased competition in the compact car segment. Analysts believe that while the company will continue to face competitive pressures, which is likely to intensify over the next two years, its strong product portfolio, servicing capability and distribution reach will be difficult to replicate. While analysts are quite bullish about volume gains, Bloomberg data indicate that four of the 10 analysts (who have rated the stock in December) have a ‘hold’ rating on Maruti. Of the remaining, three analysts have a sell rating on the stock (other three are bullish), which at the current price of Rs 1,432 is trading at 14 times its FY12 earnings.
