India’s largest passenger vehicle (PV) maker disappointed the street with weaker-than-expected financial performance in the March quarter. Even as revenues were up 20 per cent over the year-ago quarter and 10 per cent sequentially to Rs 32,048 crore, they missed street estimates. While volumes grew 10.5 per cent on a sequential basis, average selling prices were a tad lower due to a weaker product mix. Lack of semiconductor availability impacted the sales of top-end variants/premium models impacting realisations.
While the company posted 19 per cent volume growth in FY23, the Street will focus on new product launches and its ability to outperform peers. Its current order book stands at a healthy 412,000 units on the back of new launches and improved demand while the same stood at 366,000 units at the end of the December quarter. Though the company lost 170,000 in volumes due to chip shortages it expects the situation to ease in the coming quarters.
While the company expects the small car segment volumes to remain flat, it expects to outperform the passenger vehicle sector growth of 5-7 per cent growth in FY24. The superior growth is expected to come from sales of its sports utility vehicle portfolio, higher sales of models powered by compressed natural gas (CNG) and execution of the existing order book.
A third of its current order book is for CNG-based vehicles with increased demand for the same coming on the back of lower gas prices post the government’s revised domestic gas pricing guidelines. For example, CNG prices in Delhi at Rs 73.59 per kg are about 18 per cent lower than the peak of just under Rs 90/kg in November last year.
What would be crucial is the pace of growth for the SUV segment where the company has launched the Grand Vitara, Jimny and the Fronx over the last six months. The company lost market share over the last couple of years and its stock underperformed peers due to a weak portfolio offering in the SUV space (and the industry shift to SUVs), muted performance in the entry-level segment which it dominates and lack of adequate product launches. Brokerages believe that this could change going ahead.
"With the introduction of Jimny and Fronx, MSIL intends to strengthen its presence in the B-segment and aim for the leadership position in SUVs in FY24," said Vivek Kumar and Ronak Mehta of JM Financial Research. After two consecutive years of market share loss, we believe that MSIL is at the cusp of market share recovery led by new launches, they add. Given the current order backlog (Jimny and Fronx have received a good response) and new launches, the company seeks to increase its share of the SUV segment to 25 per cent in FY24 from half its levels last year building on March quarter market share which improved to 18 per cent. Overall domestic PV market share for Maruti stands at 42.9 per cent in FY23, 210 basis points lower than FY22.
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While volume recovery and market share gains would be the biggest triggers, the street will also keep an eye on margins. Gross margins contracted 60 basis points to 26.7 per cent on a sequential basis due to adverse product mix and foreign exchange impact. However, operating leverage aided the operating profit margin expansion by 70 basis points to 10.5 per cent slightly lower than Street estimates. In the near term, there could be a potential negative impact from an increase in commodity costs (steel prices), chip shortage and forex (yen has appreciated) movement. Margin gains going ahead would largely be a function of price hikes and cost savings.
Since its results the stock is up 1.3 per cent and the extent of further gains would depend upon improvement in market share. Most brokerages have a buy rating. Say Mitul Shah and Aarti Garg of Reliance Research, “In view of the strong product basket, likely margin expansion, export potential, strong return ratios and likely market share gain post new utility vehicle launches, we reiterate a buy rating.”
Maruti’s 4Q results were slightly weaker than expected (3 per cent Ebitda miss) owing to a lower gross margin. The volume growth rate at the PV industry level is likely to moderate substantially in FY24 compared to FY23. However, Maruti has a busier model launch pipeline in FY23-FY24 relative to its recent history and compared to the competition. If these models click, there is a strong case to grow faster than the industry. External gross margin tailwinds (input costs, currency) are behind. Further margin expansion from current levels would depend on market-share improvement (hence, better pricing) and internal efficiencies. "We largely retain our FY24-FY25 EPS estimates post these results. Stock performance from here would depend on the success of new models," the company said.
