Maruti Suzuki India Ltd’s full throttle drive to capture the No. 1 position in utility vehicles (UVs) bore fruit after seven years as it raced past market leader Mahindra and Mahindra Ltd to capture a 28.6% share. As for Mahindra, its share of the UV market toppled from what was almost an invincible 56% in fiscal year 2012 (FY12) to 25% in the nine months ended December 2017.
Of course, it is certain that Mahindra has not given up the battle. In a recent Investor Day presentation at Mahindra Research Valley, the senior management focused on the auto business. The host of launches lined up in the UV segment in the coming months indicates that the company hopes to stage a comeback and regain its lost market share. But this is easier said than done.
Note that when Maruti Suzuki was steadily conquering the UV market by tweaking its range and launching relatively cheaper compact UVs, such as the Vitara Brezza and Ignis, Mahindra was caught napping. Lack of products in the compact segment was its biggest failure. And now, the road ahead is arduous and rife with competition. South Korea’s Hyundai Motor Co. is a strong competitor with deep pockets. It has garnered nearly a fifth of the UV market in just two years. There is also Toyota Motor Corp. that is keen on expanding its presence in the Indian market from the present 12%.
Therefore, Mahindra’s struggle would be far greater than what it was seven years ago, when it was the market supremo. According to Bharat Gianani, an analyst at Sharekhan Ltd, “If Mahindra is targeting a market share of 30% in UVs, it appears achievable." That said, it is highly unlikely that the company will regain its stronghold with a 50%-plus market share in UVs.
Add to this, the costs of advertising and marketing to keep abreast of competition especially from Maruti Suzuki—whose reach is relatively greater—might dent profitability unless the new launches rake in strong sales volume. As such, the share of its auto division in the overall Ebit (earnings before interest and tax) has declined from two-thirds to one-third, ever since it lost ground in UVs. Profit margins have ebbed too.
Thankfully, Mahindra’s farm equipment division’s stellar growth rate over the last two years on the back of a favourable monsoon and a growing rural economy, has partially offset the pain in the auto division.
From an investor standpoint therefore, FY19 would be the make or break year for the auto segment. With Maruti Suzuki being a strong force to contend with and in the lead position, it is a tough road ahead for Mahindra.
This explains why Mahindra’s one-year forward price-to-earnings ratio has been sticky at around 17, in spite of two strong growth years for the farm equipment division.