Home >News >India >Maruti better placed to deal with current slowdown compared to its peers

NEW DELHI: A projected decline in passenger vehicle sales for this fiscal notwithstanding, Maruti Suzuki India may be better placed than its peers to deal with lockdown induced economic downturn in the country.

The company's exposure in the hatchback segment, wide network in semi urban and rural markets, and cash reserves of more than 34,000 crore will stand the it in good stead in these trying times, according to analysts.

The country's largest manufacturer of passenger vehicles was projected to lose market share in FY21 and beyond due to lack of products in the fast growing and profitable sport utility vehicle segment and its decision to pull out of the diesel vehicle market.

But given the lockdown, which has pushed businesses into losses and ravaged the economy, most brokerage firms believe that customers' affordability to have taken a hit and will thus prefer cars like hatchbacks, entry-level sedans and compact SUVs.

A likely recovery in demand is also expected to start in semi urban towns and rural areas. Hence, Maruti is believed to be in a better position this fiscal compared to its rivals.

With an uncertain outlook, Maruti Suzuki would be the fastest to recover on account of its strong brand equity and strength in entry- and mid-segment passenger vehicles, according to Jinesh Gandhi and Vipul Agrawal, research analysts at Motilal Oswal Securities.

The company’s 4Q FY20 result is a mere reflection of the 10 days of lockdown in March, with the worst yet to come in the first half of FY21. While the pain of the covid-19 crisis would result in a very weak FY21, MSIL is expected to come back stronger and recover faster than peers, they believe.

Maruti Suzuki on Wednesday reported a 28% year-on-year decline in its net profit and a 17% drop in net sales,for the fourth quarter (January-March) of FY20 due to tepid demand for its cars which was exacerbated by a nationwide lockdown to contain the spread of covid-19.

According to Shaukat Ali, senior equity analyst, Asian Markets Securities, there was a view till early March that Maruti Suzuki will face severe market share erosion going forward given strong SUV product pipeline of competitors like Tata Motors, Great Wall Motors, Kia Motors, Hyundai Motors and others.

“However, covid-19 outbreak has severely dented the demand pattern and we feel that passenger vehicle demand to remain lopsided towards entry segment hatchbacks, where Maruti Suzuki India has a strong presence with a long array of time tested models. We feel that this trend is likely to be prominent for 12-18 months, leading to an expected outperformance by Maruti Suzuki India in the coming years," said Ali.

The lockdown is expected to have an adverse impact on demand for vehicles across categories due to a sharp drop in affordability of customers across the board. Some dealerships have already witnessed sharp increase in cancellation of orders as a consequence.

“With this sharp drop in volumes, Maruti and other players in the passenger vehicle market will come under huge pressure. Given the company’s reserves of 34,000 crore, wide distribution in a semi urban and rural places and large portfolio of hatchbacks Maruti is relatively better placed to deal with the slowdown in the short term," said an analyst with a foreign brokerage firm requesting anonymity.

Some brokerages though remain apprehensive of Maruti’s ability to protect its market share in the coming months.

“We believe weak product mix (diesel/petrol mix 7%/93% coupled with higher small car share) was the main reason. We model in 17% volume decline in FY 21 which puts Maruti back in FY11 volumes. We believe Maruti’s earnings recovery faces headwinds like discretionary demand slowdown, market share challenges in profitable SUV segments and industry wide lower capacity utilizations likely to keep competitive intensity elevated," said brokerage firm ICICI Securities.

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