Maruti Suzuki faces challenges as passenger vehicle industry shows weakness

Maruti Suzuki in focus: The passenger vehicle (PV) industry is grappling with rising inventory levels, exceeding 8 weeks according to the Federation of Automobile Dealers Associations (FADA), a notable reduction in the order book despite normalised production, and a consistent uptick in discounts. Therefore, the concerns regarding the performance of the PV industry and Maruti Suzuki India Limited (MSIL) are materialising.

With the peak of the Sports Utility Vehicle (SUV) product upcycle for MSIL in the rearview mirror and no signs of a small-car revival, the outlook is subdued, leading to volume cuts of approximately 3 per cent to 7 per cent for FY24E to FY26E, according to brokerage firm Emkay. This prompts a downward revision of approximately 6.6 per cent, 10.5 per cent, and 8.7 per cent to earnings per share (EPS), placing it below consensus estimates by around 12 per cent. 

Potential upside risks include a revival in small cars similar to the entry-level two-wheelers and the launch of MSIL's industry-first Battery Electric Vehicle (BEV) in October 2024, the brokerage firm noted.

Meanwhile, the PV industry's growth in recent years has been propelled by new launches, with market share gains for companies boasting a strong product cycle. MSIL experienced market share gains in the past 12-18 months due to positive responses to its SUV launches. 

However, emerging trends, such as higher inventory levels, a swift decline in the order book, and escalating discounts, are causes for monitoring, Emkay highlighted.

The third quarter Financial Year 2024 estimate (Q3 FY24E) is expected to be challenging for MSIL due to a lack of operating leverage, a decline in volumes, a change in product mix with a lower share of SUVs, and increased discounts. The company is likely to witness a decline in EBITDA margin QoQ to around 12 per cent, the report said.

The outlook for Financial Year 25 estimate-FY26 estimate (FY25E-26E) appears subdued with a revised approximately 5 per cent volume Compound Annual Growth Rate (CAGR), driven by limited new launches and no revival in small cars. 

The core Earnings per share Compound Annual Growth Rate (EPS CAGR) is expected to slow down to approximately 9 per cent over FY24E-26E compared to approximately 21 per cent YoY in Financial Year 2024 estimates (FY24E).

Despite the challenges, Emkay has an ‘Add’ recommendation on the stock, with a revised target price of Rs 10,700 per share.

Maruti December sales

Maruti total sales dropped 1.3 per cent to 1.37 lakh units, against 1.39 lakh units in December 2022.

Image Credits: Maruti Suzuki

The company crossed the annual sales milestone of 20 lakh units in the calendar year 2023.

Domestic sales dropped 6 per cent to 1.10 lakh units, from 1.17 lakh units in the previous year. However, the exports surged over 23 per cent to 26,884 units in December 2023, against 21,796 units in December 2022.

Stock performance

The stock climbed 20.86 per cent in 2023, in line with the benchmark indices. The stock’s 52-week high is Rs 10,930 per share, while its 52-week low is Rs 8,127.05 per share.

The market capitalisation of the company is over Rs 3.15 lakh crore, according to BSE.

Maruti Suzuki stocks settled 0.76 per cent higher at Rs 10,023.05 per share when the market closed on Tuesday, January 9, 2024.