While Maruti’s strengths are well known, the Street seems to have run ahead of itself given that the outlook remains muted. One of the reasons for Street’s optimism has been the hope of an uptick in volumes, which remains the key trigger for the company. The Maruti management indicated that retail sales in the festival period have seen some green shoots, and there has been an uptick in retail momentum. However, they added that there is little clarity on the sustainability of the trend in the absence of festival demand and current discounts.
Analysts at ICICI Securities, too, remain sceptical. “We have just witnessed a festive season with all-time high discounts (Rs 25,800 per unit in September quarter or Q2) failing to unleash consumer purchase frenzy. This probably signals a slow grind for demand recovery. Surprisingly, valuations remain divergent.” Given five consecutive quarters of volumes decline, the company has had to give higher discounts to improve volumes.
The other worry is the market share loss. Maruti’s market share has declined 120 basis points quarter-on-quarter to 49.8 per cent in Q2. Analysts at HDFC Securities believe that this was mainly because of a decline in the share of the utility vehicle (UV) segment to 25.7 per cent from 26.3 per cent, led by the phasing out of the diesel portfolio. The company will not be converting its diesel offerings to BSVI for now. The change in consumer choices could also be hurting Maruti.
Nirmal Bang Institutional Equities believes that consumer preference is moving towards utility vehicles, with 10 of the 13 new launches in the passenger vehicle segment being UVs. Analysts at the brokerage say since Maruti is dominant in the car segment, which is declining faster than UVs, it has been losing share. This trend of market share loss is expected to continue as more models are launched by rivals in the UV segment.
There are, however, some positives for Maruti. Despite a sharp 30 per cent decline in volumes, revenue fall was contained due to higher realisations. The company was able to increase average selling prices of its vehicles by 7 per cent year-on-year in Q2 to pass on the safety equipment and BSVI-related cost increases. Its new offerings (S-Presso and XL6) also saw good response post launch, which is important given the volume decline in entry-level and other segments. The decline in commodity prices is another positive given the pressure on margins on account of falling volumes. Margins in the quarter fell 500 basis points year-on-year to 9.5 per cent. While lower commodity costs are a tailwind, the biggest drag on margins is negative operating leverage. Thus, if sales volume does not increase, the stock, which has outperformed most of its peers over the last quarter, will find it difficult to maintain its gains.