Maruti’s desire to be spoiled by higher costs
Maruti Suzuki India Ltd started FY23 on a boring note. Sales volumes in April fell 6% year-on-year (yoy), which was worse than expected.
The semiconductor shortage, due to which the automaker was unable to produce about 270,000 units in FY22, would have a slight impact on production in FY23, the company said. company during the March quarter earnings call (Q4FY22). Lower production, low margin (at 6.5%) and higher working capital resulted in negative free cash flow in FY22.
However, demand is healthy, as evidenced by the current backlog of over 320,000 units, an increase from 268,000 units at the end of the fourth quarter. It also reflects to some extent underproduction due to supply constraints.
“Despite rising vehicle and fuel prices driving up the cost of ownership, we see a low risk of deterioration in passenger vehicle (PV) demand. Historically, demand has shown a much higher correlation with gross domestic product growth than with cost of ownership,” Jefferies India analysts said in an April 29 report.
Maruti’s fourth-quarter standalone revenue increased 11% year-on-year to ₹26,740 crore, due to price increases and lower discounts as volumes declined 0.7% year-on-year. Better operating leverage led to a year-on-year and sequential increase in Ebitda margin of 79 basis points (bps) and 237 bps respectively to 9.1%, beating Bloomberg’s estimate of 8.2 %. One basis point equals 0.01%. Stable commodity prices also contributed to the sequential margin increase.
It remains to be seen whether margins can stay at these levels given the cost pressures. “Exports have supported Maruti Suzuki’s margins and as such, increasing export share would be key going forward,” said Varun Baxi, analyst at Nirmal Bang Equities. Maruti’s exports in FY22 were 14% of total volumes, compared to 7% in FY21. The company’s total volume was 1,652,653 units in FY22.
Maruti expects costs to rise in Q1FY23. Management noted that precious metal prices are cooling but steel price concerns remain.
Against this backdrop, margins are expected to fall in the first half of FY23, followed by a recovery in the second half of FY23.
Meanwhile, higher fuel prices have led to a growing preference for compressed natural gas (CNG) vehicles. Up to 40% of pending orders are for CNG vehicles.
Maruti shares are trading at 23.9 times its estimated FY24 earnings, which is inexpensive relative to its growth potential, said Aniket Mhatre, institutional research analyst, HDFC Securities. Admittedly, the loss of market share in the PV segment is worrying. “The company is likely to regain its previous market share of 50% in PV, up from 44% currently, thanks to a strong product pipeline that would help revalue the stock,” Mhatre said.