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Maruti’s September quarter reveals effects of down-trading on car sales

One positive is that volumes have been on the mend. Maruti sold 393,000 units in Q2, an increase of 16.2% y-o-y

Maruti Suzuki India Ltd’s buildup on the post-covid momentum and the pickup in sales of passenger vehicles has fallen a tad short of the Street’s expectations. This could be attributed to the down-trading in car sales due to the higher entry-level mid-sized car sales. Its stock slipped on Thursday, and could come under a cloud if the festival sales don’t match expectations.

Maruti Suzuki India Ltd’s buildup on the post-covid momentum and the pickup in sales of passenger vehicles has fallen a tad short of the Street’s expectations. This could be attributed to the down-trading in car sales due to the higher entry-level mid-sized car sales. Its stock slipped on Thursday, and could come under a cloud if the festival sales don’t match expectations.

Maruti’s 10.4% year-on-year (y-o-y) revenue growth in Q2 was slower than the Street’s expectations due to the lower average selling prices. Part of this is due to a weak sales mix. Sales volume of entry-level and mid-sized cars have increased due to a rise in first-time buyers compared to last year.

Maruti’s 10.4% year-on-year (y-o-y) revenue growth in Q2 was slower than the Street’s expectations due to the lower average selling prices. Part of this is due to a weak sales mix. Sales volume of entry-level and mid-sized cars have increased due to a rise in first-time buyers compared to last year.

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That brought down the average selling price by about 6% sequentially, pointed out analysts.

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“This points to some element of down-trading, with customers preferring lower variant models within a similar vehicle category," said ICICI Securities in a client note.

Replacement demand is also notably lower compared to last year, though, there it is moderating lately.

One positive is that passenger vehicle volumes have been on the mend. Maruti sold about 393,000 units during the quarter, which was up a decent 16.2% y-o-y. A sharp increase has been seen in domestic volumes at about 18.6% y-o-y, while exports shrank marginally.

Of course, all eyes are on the ongoing festival season and whether volumes could see further increase.

Maruti has been operating at high capacities in the past few months after the lockdown restrictions were relaxed, and inventory channels have been stocked up to a large extent.

Maruti’s operating margins of about 10.3% were just about in line with the Street’s expectations. While some cost savings were seen due to lower promotion expenses, an increase in commodity prices kept a lid on margin expansion. This is despite the fact that discounts were notably lower during the quarter compared to last year.

While the Maruti stock has been rising on the back of improved volume growth, it has not been able to scale the pre-covid level highs. Investors will still be looking for improved festival season sales in the coming months as dealer stocking and wholesales continue to rise. Given that there has been a notable down-trading, a margin pickup in the coming months may be difficult as expenses could also normalize.

Besides, Maruti’s valuations also shot up considerably in the past few months due to lower earnings growth. The stock’s one-year forward earnings multiple is at about 46 times earnings as per Bloomberg data, which seems on the higher side. A noticeable pickup in high-end car variants may be needed in the coming months to support valuations.

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