Margins likely to remain weak in Q4; FY22 is expected to be strong; new launches will be key; ‘Buy’ maintained
A positive for Maruti is that competition has peaked of late and we think it is unlikely to increase further materially.
Maruti Suzuki ended the year on a strong note with a wholesale figure of 168K in March, leading to a full-year volume decline of 7%. However, in our view, Retail volumes were nearly flat y-o-y, despite the lockdown. Inventory remains extremely low and we continue to expect a strong FY22, with volume growing c30% y-o-y. In terms of wholesale market share, MSIL ended at 46% in both March and in Q4, with 48% in FY21. However, adjusted for the decline in inventory and sales to Toyota, the market share decline is under 100bps (MSIL entered the year with decent inventory due to the early BS VI transition). A positive for Maruti is that competition has peaked of late and we think it is unlikely to increase further materially. All the key competitors TTMT, M&M, Renault, Kia, Nissan and Hyundai have had strong recent launches.
New launches are key now for MSIL: MSIL successfully restricted its market share loss in FY21, thanks to the strong brand, distribution and marketing. However, margins continue to track much lower than at the last peak (10% vs 15%). For margins to return to the 12-13% range (street expectation), new launches remain the key. New launches lead to higher volumes, but more importantly pricing power and a better variant mix. The last upcycle in margins (FY15/16) for MSIL coincided with a strong launch pipeline as well.
So, we think it’s logical to assume some major product action from Maruti in the coming months/quarters. An upgraded Brezza, Baleno, Jimny and a large SUV are some of the potential products that could help volumes, margins and sentiment in the stock over the next 12-24 months.
Margins likely to remain weak in Q4FY21: MSIL raised prices in January (average of c1.5%) and we expect it to do so again in April (2-3%). However, commodity headwinds are huge and the lack of new product launches is always a constraint on profitability. On a positive note, the JPY has depreciated and discounts have reduced. Factoring in all this, we cut our margin estimates for Q4FY21 and FY22. We still expect Ebitda margins to grow to c13% in FY23, on new launches and operating leverage. We retain Buy rating and Rs 8,400 TP.