While the company continues to impress with volume growth, its biggest worry is the loss in market share in its bread-and-butter A2 segment.
Despite impressive volume growth, India’s largest passenger vehicle (PV) maker is likely to face problems from new competition, higher input costs and capacity constraints. The country’s top car maker crossed the one million mark in PV sales for 2009-10, 29 per cent growth over the previous financial year. A spurt in domestic demand after a lacklustre 2008-09, higher exports and increased sales in rural markets helped.
While exports doubled in 2009-10 to 147,000 units over the previous financial year, rural sales now account for 16.5 per cent of total— up 700 basis points over the 2008-09 figure of 9.5 per cent. But, what the market is most worried about is the fact that the company has been losing market share on the back of new launches in the March quarter. It is little wonder that the stock has lost 18 per cent during the period and is now trading at Rs 1,272.
Losing share
In the March quarter, Maruti saw its market share decline by over 400 basis points year-on-year and 130 basis points sequentially to 41.5 per cent due to competition and capacity constraints. Maruti has been facing intense competition in the A2 segment (over 70 per cent of its sales) due to recent launches of new models such as Volkswagen Polo, Chevrolet Beat and Ford Figo. All these were launched in the March quarter and priced in the Rs 3.5-4.5 lakh range. Maruti is hoping that the new WagonR, priced between Rs 3.28 lakh and Rs 3.81 lakh, will arrest the decline in market share in a segment that has as many as 20 models trying to outdo each other.
Capacity issues The second issue for Maruti is capacity constraints. Its plants at Gurgaon and Manesar have been running at full capacity of a million units for some time now. The management believes it will be able to increase the capacity by 70,000 units by reducing bottlenecks and improving productivity. The company plans to add a capacity of 250,000 units at the Manesar plant by 2011-12.
Results: Below expectations
Maruti’s March quarter performance looks impressive on a year-on-year basis with sales up 31 per cent and net profit up 170 per cent (due to last year’s low base). On a sequential basis, though net sales were up on the back of higher volumes and realisations, Ebidta (earnings before interest, depreciation, taxes and amortisation) margins and net profit fell.
| GROWTH DESPITE MARCH DIP | ||||||
| in Rs crore | Q4 FY10 | % chg | FY10 | % chg | FY11E | % chg |
| Volumes (lakh) | 2.9 | 11.4 | 10.2 | 28.5 | 11.49 | 13.0 |
| Net Sales | 8,424 | 12.3 | 29,302 | 42.5 | 35,020 | 21.0 |
| Ebidta | 1,111 | -2.0 | 3,954 | 71.6 | 4,590 | 16.0 |
| Net profit | 656 | -4.6 | 2,497 | 61.2 | 3,021 | 21.0 |
| % change is y-o-y for FY10, FY11 and q-o-q for Q4FY10 (March quarter) Source: Analyst reports | ||||||
Higher raw material costs took a toll on margins, which dipped 190 basis points to 13.2 per cent. Higher expenditure is due to a spike in input costs, cost of upgrade to BS-IV norms, initial costs of new models (Eeco and 1.2-litre Swift) and forex losses. The net profit of Rs 656 crore was lower than analysts’ expectations due to higher depreciation and lower interest income. While Maruti has already raised prices at the start of this month due to an increase in raw material costs and to meet the cost of upgrading vehicles to meet new emission norms (between Rs 1,000 to Rs 10,000 on various models), it may look at more such hikes if demand remains strong or raw material costs move up.
Conclusion
The road ahead might get tougher for the small car leader as Nissan and Toyota plan to launch their Micra and Etios models, respectively. These premium hatchbacks, to be launched in the current financial year, could give Maruti’s higher-end hatchbacks (Swift and Ritz) a run for their money.
However, what will stand in good stead for the market leader are its unparalleled distribution network, cost competitiveness and product strength. The company will bank on these advantages to get a bigger pie of the automobile sector, expected to grow 10-15 per cent in 2010-11. The scrip is trading at 12.2 times its 2010-11 earnings per share estimate of Rs 104 and should deliver about 20 per cent returns over the next one year.
