Markets
Can Maruti sustain its high margin?
Summary
- The management hopes to sustain margins in the second half of this financial year primarily banking on a higher thrust on premiumization.
Maruti Suzuki India Ltd is in top gear. It clocked record sales volumes and revenue in the September quarter (Q2FY24). But the hero was Ebitda margin at 12.9%, beating expectations. Investors rewarded this by taking the stock to a new 52-high week of ₹10,845 apiece on Friday. Easing commodity costs (particularly precious metals), favourable product mix and cost saving initiatives boosted profitability. Analysts have now upgraded their FY24/FY25 earnings estimates for Maruti.
The management hopes to sustain margins in the second half of this financial year primarily banking on a higher thrust on premiumization. A vast portion of Maruti’s current order book comprises new sport utility vehicles (SUVs), the management said. SUVs fetch relatively higher margins and the higher share would aid average selling price and Ebitda per vehicle. Further, new launches—Brezza, Grand Vitara and Fronx—helped Maruti raise its market share in the SUV segment to 23% in the September quarter compared to around 20% in Q1.
Favourable foreign currency movement and a revival in exports are other potential triggers for margin. Conversely, there would be festive discounts. Plus, the price of steel, a key input, is rising. So, predicting margin trajectory is no cakewalk. The management foresees the passenger vehicle industry logging around 5% volume growth this year with Maruti’s growth pegged at 10%. In the festival season (from Onam to Diwali) the industry is anticipated to grow at 18% and Maruti is likely to grow in line.
The management has reiterated its target of increasing the number of models to 28 by FY30-31 from 17 currently. This will also allow Maruti to boost market share and also achieve its target of a three-fold rise in exports in that span.
But the persistent weakness in Maruti’s small car segment is a worry. A hit in income levels of the segment’s potential customers has weighed on demand, prompting Maruti to give higher discounts to push sales. Notably, the company’s total order book has dropped consistently. In Q2, order book stood at 288,000 units compared to 355,000 in Q1FY24 and 412,000 in Q4FY23. Thus, a revival in overall industry outlook in FY25 is a key monitorable. That said, the stock has risen 26% so far in 2023, suggesting investors are capturing the brighter picture sufficiently, for now.
