Markets
Maruti Suzuki banks on SUVs, CNG models to beat demand blues
Summary
- The automaker reported a 20% on-year drop in passenger car sales in the second quarter, but SUV sales rose 9%. Unlike its rivals, Maruti has no plans to launch new SUV models in FY25.
Sport utility vehicles (SUVs) and compressed natural gas (CNG) variants of existing models are currently driving auto demand in India. Better sales of SUVs and CNG variants is said to be a factor responsible for the 1% sequential growth in the company’s average selling price for the September quarter (Q2FY25).
Notably, a good part of the demand for SUVs is coming from rural customers, indicating that the ongoing trend of ‘premiumization’ is not restricted to urban markets alone. SUVs now form about 54% of the total mix in rural areas, where Maruti Suzuki company plans to expand its premium Nexa outlets.
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Unlike its rivals, Maruti has no plans to launch new SUV models in FY25. Investors can thus expect stiff competition to weigh on its SUV market share of 26%. The carmaker’s overall market share fell 50 basis points (bps) to 40.3% in Q2 as it struggled to attract customers for its entry-level hatchbacks and sedans.
Deeper discounts and limited-edition launches during the quarter did not help. Maruti’s revenue was flat year-on-year at ₹37,200 crore. The average discount per vehicle was ₹29,300 in Q2 versus ₹21,700 in Q1. Higher marketing expenditure and firm raw material costs hurt Q2 profitability, with the Ebitda margin shrinking 100 bps year-on-year to 11.9%, missing analysts estimates by 80 bps.
Diwali to the rescue?
Management estimates 14% on-year growth in the festive season, from Shraddh to Diwali. By the end of the festive season, network inventory is expected to drop to about 30 days. This means reduced discounting pressure in Q3.
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“The sharp increase in discounting is hiding the strong mix benefit that Maruti Suzuki India enjoys on the back of higher CNG mix," said a report by BNP Paribas Securities India. “We see the roll out of more hybrid variants and launch of EV models as key medium- to long-term catalysts," it added. Maruti is optimistic that the growing CNG segment, which now accounts for about 33% of its total sales, will soothe its demand woes and spur growth.
Amid lower demand, Maruti’s shares are down about 10% so far in FY25. “At sub-22x FY26 (estimated) earnings per share, Maruti is trading at a discount to its own history and an 18% discount to the auto OEM (original equipment manufacturer) basket in India," said IIFL Securities. The broking firm believes the first concrete signs of a recovery in the passenger vehicle industry will drive a re-rating of the stock.
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