Margins, premium product mix to set course for Maruti

ET Intelligence Group: Maruti Suzuki is still the favourite mile muncher in India’s post-lockdown drive — but not in the most swish set of wheels in its garage.The Maruti dashboard displayed good sales volumes in the September quarter, although the proportion of entry-level cars increased, crimping margin expansion at the carmaker that sells one of every two cars running on Indian roads. So, margins and a more premium product mix in its sales will determine directional trends for the Maruti stock.Sales volume of the maker of Alto and Swift rose 16 per cent to 3.93 lakh units, but operating margins at 10.3 per cent fell short of expectations. Typically, margins shrink when discounts are high. But with discounts actually reducing, the decline is explained by a sales mix dominated by entry-level vehicles.Product mix is changing due to the higher share of the mini cars in total volumes and the absence of diesel variants, which are about Rs 1 lakh more expensive than petrol cars. The share of the mini cars rose to 24 per cent in the September quarter, a gain of almost 500 basis points compared with last year. Consequently, the average realisation per vehicle dropped by 5.1 per cent to Rs 4.76 lakh, the lowest in six quarters. The decline in realisations depressed revenue growth at 10 per cent despite 16 per cent volume expansion. A lot of first-time buyers are choosing personal mobility over shared or public transportation, thus increasing the proportion of smaller cars in total volumes. In addition, more rural sales than urban are pushing demand for lower-priced models. The share of rural rose 41 per cent in the September quarter, a gain of around 300 basis points from the last fiscal year. That might limit the company’s ability to boost prices to offset higher commodity costs. The management said pressure on margins may continue over the next couple of quarters due to higher commodity prices.78939980Projected operating profit margins for the current and next fiscal year were in the range of 10-12.5 per cent.Therefore, volume growth is key. Retail sales growth in the Navratri is 30 per cent compared with the previous year season, and plants are running at more than 90 per cent of capacity utilisation. The Street has pencilled in volume of 13-13.5 lakh units for the current fiscal, which implied volume decline of 13 per cent compared with FY20.However, the current momentum suggests the projections could be revised upward to 13.7-14.25 lakh units. The stock is trading at 34 times one-year forward earnings, a 68 per cent premium to the long-term average. Premium valuations suggest the market has already priced in a volume upcycle.

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