Maruti Suzuki to drive into the SUV lane as small cars become dearer
- India’s largest car maker
Maruti Suzukiis looking towards sports utility vehicles (SUV) and electric cars for its next phase of growth.
- The company’s chairman RC Bharghava said shifting consumer preferences and increasing prices of entry-level cars like the Alto K10 are driving people away from these cars.
- While the company expects small cars to remain flat in FY24, it expects utility vehicles to continue to lead growth.
AdvertisementIndia’s largest car maker Maruti Suzuki is looking towards sports utility vehicles (SUV) and electric cars for its next phase of growth as shifting consumer preferences and increasing prices of small cars like the Alto K10 are driving people away from them.
The car maker’s shares were trading flat on Thursday morning even as brokerages underlined that margins are expected to recover and demand is expected to be stable going forward.
Maruti Suzuki reported a 43% YoY rise in its standalone net profit to ₹2,624 crore in Q4. It is also the first auto company to cross the ₹1 lakh crore turnover mark in a financial year. Overall, its FY23 revenue grew 33% to ₹1.18 lakh crore while total domestic volumes increased 20.7%, led by utility vehicles and compact cars.
Maruti Suzuki’s shares have gained 2.9% in the last one month, and a meager 1.37% in 2023 so far, underperforming the broader Nifty Auto index which gained nearly 8% and 2%, respectively.
Still, post the Q4 performance and forward-looking commentary, an average of brokerage estimates suggests that there is an upside of nearly 22% in the next 12 months, with the average target price being ₹10,355 while the current market price is ₹8,518.
Small cars in the slow lane
On the other hand, entry-level cars like Alto K10 and S-Presso, which accounted for 14% of the company’s total sales in FY23, grew just 10% during the year.
This is an industry-wide trend and not just limited to Maruti Suzuki. Data from SIAM highlighted that while utility vehicles have grown at a rapid pace of nearly 35% in FY23 crossing the 2 million mark during the year, small cars grew at a much slower pace of about 10% in this period.
The outlook for the small car segment looks worse for FY24. Maruti Suzuki’s chairman RC Bharghava said in a post-earnings call with analysts that the growth in small cars is expected to remain flat, but added that he’s “not losing sleep over it”.
There are two reasons for this, according to Bharghava – a decisive shift in consumer buying preferences, which is reflected in the growth in the utility vehicles segment.
AdvertisementThe other reason is affordability – small cars have gotten expensive over the years due to reasons like inflation, new regulatory requirements adding costs, among others.
For instance, the entry-level Alto K10 starts at ₹4.7 lakh and goes all the way up to ₹7 lakh (approximate on-road prices), making them out of the reach of many people in a country. The average annual salary in India was ₹3.88 lakh per annum in 2021, according to data from the Reserve Bank of India.
Bharghava quipped that Indians will need to get richer for the small cars to grow further. His expectation of flat growth in small car sales in FY24 also points at a wider economic slowdown.
The next phase of growth – utility vehicles and electric cars
Despite this, Maruti Suzuki is setting itself up for the next phase of growth with the addition of 1 million annual manufacturing capacity and a capital expenditure of ₹8,000 crore, which is 27% higher than the capex spends of FY23.
AdvertisementPowering the next phase of growth will be utility vehicles and electric cars – Bharghava said that Maruti will launch multiple new utility vehicles in the current financial year as it looks to expand its portfolio to counter the challenge by rivals like Tata Motors and M&M.
Utility vehicles accounted for 21% of Maruti Suzuki’s total domestic volumes in FY23, and 24% in Q4.
In addition to this, the car maker has announced plans to launch six new electric vehicles by 2030. The company had shown off a concept version in February this year, but the first production model is expected to roll out only in 2025.
Maruti Suzuki expects the share of electric vehicles – both pure and hybrid – to go up to 40% by 2030.
Analysts expect margin improvements going forward
AdvertisementA combination of a richer product mix due to faster growth of utility vehicles, cooling commodity prices, cost control and smaller discounts are expected to help Maruti Suzuki post margin improvements.
“We believe going forward, strong demand, improving supplies, moderating commodity inflation and moderate discounts will help EBITDA margins to recover to 11.2% in FY24E, versus 9.4% in FY23,” said the analysts at Yes Securities.
Analysts at Motilal Oswal echoed similar sentiments while expressing their bullish outlook on the stock, adding that improving supplies thanks to easing semiconductor constraints will aid Maruti Suzuki’s margins.
“After two consecutive years of market share loss, we believe that Maruti Suzuki is at the cusp of market share recovery led by new launches. Healthy order book and operating leverage tailwinds will further support strong performance going ahead,” the analysts at JM Financial said.
Overall, both analysts and the company itself expect Maruti Suzuki to outperform the industry in FY24, which is expected to register a volume growth of 5-7%. A strong order book of 4.12 lakh units or about 25% of Maruti Suzuki’s FY23 volumes also adds to the confidence.
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