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Maruti Suzuki India Ltd. (REUTERS)
Maruti Suzuki India Ltd. (REUTERS)

Maruti expected to gain market share but challenges remain in SUV segment

Investors have been bullish about the prospects of Maruti in the near term since it is likely to benefit from a shift in demand towards small cars because of a slowing economy and increasing preference for personal mobility on fears of contracting infection

Maruti Suzuki India Ltd – country’s largest passenger vehicle manufacturer – is expected gain market share this fiscal year due to increase in sales of hatchbacks and sharp drop in sales of diesel vehicles, after the easing of the lockdown measures from May, brokerages said. Growing competition in the sport utility vehicle segment and lack of products in the space might prove to be a challenge for the company.

Investors have been bullish about the prospects of Maruti in the near term since it is likely to benefit from a shift in demand towards small cars because of a slowing economy and increasing preference for personal mobility on fears of contracting infection.

“We believe Maruti Suzuki would gain further market share, driven by an expected shift toward petrol vehicles, resulting in a 4.3% volume CAGR over FY20–23E. This, coupled with an improved mix and reduced discounts, would drive a revenue CAGR of 6% over FY20–23E," said analysts of Motilal Oswal in a report on July 30.

“We believe MSIL could emerge as the biggest beneficiary of demand recovery in the post-COVID era, considering its stronghold in the entry-level segment and a favorable product life cycle. MSIL’s new launches, targeted at filling the gaps in its portfolio, are likely to improve the overall product mix," analysts added.

In a post earnings investor call Maruti’s management indicated that demand for entry level cars have increased by 1000 basis points to 65-66% while the number of first time customers also rose by 550 basis points to 50-51% during the quarter. Also, overall share of diesel engine cars in the industry also dropped sharply to 20.6% from 29.5%, in the year ago period.

Maruti stopped production of diesel cars from April 1, 2020, due to increase in cost of development compared to petrol.

“The share of diesel vehicles in the passenger vehicle industry has reduced to 20.6% from 29.5% last year. Amid the increasing share of petrol vehicles, MSIL’s strong presence in this segment is expected to support the sustenance of its market share," said analysts of Emkay Global in a report.

Some of the brokerages though are concerned about the increasing competition in the utility vehicle segment and the impact it might have on Maruti’s volumes in the medium term. Company’s market share has been under pressure in the segment after the launch of two products - Venue (compact SUV) and Creta (mid-size SUV) – by Hyundai. New entrant Kia Motors will also launch its new compact SUV, Sonet, in the market in August. Other players like Volkswagen, Renault and Nissan are also planning to launch new products in the utility vehicle segment.

“We believe MSIL faces headwinds in maintaining its market share as customer preference continue to rotate towards utility vehicles (no visible downtrading in sales) amidst rising competition. Given high expectations, we worry about the sustenance of current stratospheric valuations," said analysts of ICICI securities in a report.

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