Maruti Suzuki: Regaining share, margins

Last Updated: Thu, Dec 13, 2012 04:27 hrs

The Maruti Suzuki stock touched a 52-week high last week after the company reported good volume growth in November and announced plans to raise prices by up to Rs 20,000 across models from January 1, 2013. The firm took the step to protect its margins as the weakening Indian currency, which has fallen five per cent against the yen over the past month, is making imports expensive.

Notably, the company has been able to clock better-than-industry volumes in the current fiscal, which along with new launches in future should help it recover part of the lost market share. Besides, an improving product mix should aid margins and help drive profits. Thus, many analysts are positive on the stock, which at Rs 1,473 is trading at 14.7 times its FY14 earnings estimates. Given analysts' price targets of Rs 1,600-1,700, there is room for upside of 9-15 per cent. Any rate cut by the Reserve Bank of India (RBI) should improve prospects.

Gaining ground
Aided by strong sales in the compact (Swift, Estilo and Ritz) and super compact (Dzire) segments, the company recorded a nine per cent year-on-year (y-o-y) increase in domestic sales in November, much better than the decline of eight per cent reported by the sector. However, despite the good performance of the Alto family, mini car (M800, Astar, Alto and Wagon R) sales dipped six per cent y-o-y in November, on the back of higher finance cost and interest rates as well as a sharp drop in demand for petrol vehicles. This trend, however, could change, given the recent launch of the new Alto (CNG version) and expected decline in interest rates. Overall, for November, Maruti reported a 12.5 per cent y-o-y growth, aided by strong exports.

On a year-to-date basis, too, while the company has reported a sales growth of five per cent in passenger cars, the sector has posted flattish growth. Despite the not-so-attractive domestic sales picture, most analysts are bullish on the largest passenger car maker on both the volumes/market share fronts and profitability.

Going ahead, Morgan Stanley analysts Binay Singh and Shreya Gaunekar believe that Maruti will continue to outpace the industry as the new Alto has seen good response, receiving 50,000 bookings over two months. Analysts expect the company to report about seven per cent sales growth for FY13 while that for FY14 on the back of a low base is expected to be upwards of 16 per cent.

On market share, Amit Kasat and Aniket Mhatre of Standard Chartered research say, "Strong order backlog and new launches are expected to help revive lost market share for MSIL (Maruti) – we expect 270 basis points gain by FY13." The share had fallen to 37 per cent in the first half of FY13 from 45 per cent in FY11 due to labour problems and lack of diesel engine capacity. Resolution of these issues and good response to the Ertiga should help the company get back part of the lost market share, say Srinivas Rao and Amyn Pirani of Deutsche Bank.

Margins, exports
Lower volumes, higher discounts on petrol models and unfavourable currency impact saw margins come down to 6.3 per cent (120 basis points sequentially, 20 basis points y-o-y) in the September quarter. Volume recovery, both on the domestic/exports, as well as improving product mix and price hikes are likely to help mitigate part of the cost pressures.

"Improved mix, lower input costs and SPIL merger are expected to lead to 300 basis points margin recovery," say Kasat and Mhatre of Standard Chartered Research. Most analysts believe that margins should perk up to seven-eight per cent over the next few quarters. One of the key reasons is a favourable product mix with higher sales of Dzire, Ertiga, Swift and the non-discounted Alto models. While the mini segment's share of overall volumes is down 500-600 basis points, both on yearly and on sequential basis, those of higher margin segments have gone up by 100 basis points.

Says Rohan Korde of Anand Rathi Research, "Positives from a better product mix, the gains from the one per cent price hike in October, and better export revenues would benefit the company."

While domestic sales are on a sure footing, exports too have revived with the company registering a 38 per cent y-o-y jump in November on a lower base. Analysts do not see the hiking of import duty in Sri Lanka (accounts for 12,000 units a year) as a major hurdle as the company has a fairly diversified geographic basket. Europe, which dominated its exports and accounted for 70 per cent of export sales three years ago, now accounts for 30 per cent. "One market going down will not make a large impact on Maruti as export loss is absorbed by its other markets," says an analyst with a foreign brokerage house.

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