Higher costs to slow down Maruti’s drive

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Maruti Suzuki India Ltd has begun FY23 on a dull note. Sales volumes in April fell by 6% year-on-year (y-o-y), which was worse than expected.

Semiconductor shortage, because of which the automaker could not produce about 270,000 units in FY22, would have a mild impact on production in FY23, the company said in the March quarter (Q4FY22) earnings call. Less production, low margin (at 6.5%), and higher working capital meant negative free cash flow in FY22.

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However, demand is healthy, as is evident from the current order book of more than 320,000 units, an increase from the 268,000 units at the end of Q4. This also reflects under-production to a certain extent because of supply constraints.

“Despite higher vehicle and fuel prices pushing up ownership cost, we see low risk of demand deterioration in passenger vehicles (PVs). Historically, demand has shown much higher correlation to gross domestic product growth than to cost of ownership,” said analysts at Jefferies India in a report on 29 April.

Maruti’s standalone revenues in Q4 rose by 11% y-o-y to 26,740 crore, because of price hikes and lower discounts as volumes declined by 0.7% y-o-y. Better operating leverage led to y-o-y and sequential expansion in Ebitda margin by 79 basis points (bps) and 237 bps respectively to 9.1%, surpassing the Bloomberg estimate of 8.2%. One basis point is 0.01%. Steady commodity costs also aided the sequential rise in margin.

It remains to be seen if margins can remain at these levels given the cost pressures. “Exports have supported Maruti Suzuki’s margins and, as such, increasing the share of exports would be key going ahead,” said Varun Baxi, analyst, Nirmal Bang Equities. Maruti’s exports in FY22 accounted for 14% of total volumes compared to 7% in FY21. The company’s total volume stood at 1,652,653 units in FY22.

Maruti expects costs to increase in Q1FY23. The management pointed out that the prices of precious metals are cooling but concerns on steel prices remain.

Against this backdrop, margins are expected to drop in H1FY23, followed by a recovery in the second half of FY23.

Meanwhile, higher fuel prices have resulted in an increasing preference for compressed natural gas (CNG) vehicles. As much as 40% of pending orders are for CNG vehicles.

Maruti’s shares trade at 23.9 times its FY24 estimated earnings, which is inexpensive, compared to its growth potential, said Aniket Mhatre, institutional research analyst, HDFC Securities. True, market share loss in the PV segment is a concern. “The company is likely to regain its earlier market share of 50% in PVs from 44% at present on the back of a strong product pipeline that would help re-rate the stock,” said Mhatre.

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