With electric vehicles and sports utility vehicles becoming consumer favourites, India’s largest carmaker, Maruti Suzuki, is at the threshold of vast growth opportunities. It has pivoted at the right time to catch hold of the growth triggers, investors and analysts said.
Four decades after the first Maruti 800 rolled out of the Gurgaon manufacturing plant in 1983, Maruti Suzuki is staring at changing market dynamics. In 2022, chairman RC Bhargava said the company’s “bread and butter” segment – the small car market – was shrinking. The “butter” had gone and only the “bread” was left due to the rising cost of vehicles.
“There is income disparity in the compact vehicle segment, which still contributes 60 percent of Maruti’s total volumes. The cost of owning a compact car has gone up substantially compared to the segmental class’s income,” said Sajit John, an equity research analyst at Geojit BNP Paribas.
In this context, Maruti’s SUV segment is steering it on to a new growth path.
With new models such as Vitara, Jimny, Fronx and Invicto, Maruti is slowly making a mark in the SUV market. The company’s market share in SUVs improved to 23 percent in Q1 of FY24 from 18 percent in FY23, according to data compiled by Jefferies. This number was 14 percent 10 years ago.
The new launches have garnered positive reviews for their fuel efficiency, ample boot space, and drive dynamics. An online review by a customer for Vitara said Maruti’s SUVs are “genuinely good looking cars.”
Of the 355,000 order book in June, three-fourths were SUVs, said John.
As SUVs become a larger part of the portfolio, the company’s average selling price will go up too, said analysts. Maruti Suzuki’s average selling price was a little over Rs 6 lakh in Q1, growing 15 percent year-on-year and 3 percent sequentially.
Simplifying the structure
Maruti Suzuki has also been fashionably late to the EV party. The company plans to introduce six electric vehicles across segments by FY31.
It also chalked out a plan to achieve a powertrain ratio of 15 percent BEVs (battery EVs), 25 percent HEVs (hybrid EVs) and 60 percent ICE (internal combustion engine).
Commonality of core components between strong hybrids and EVs could help drive cost leadership in electrics, analysts at Emkay Global said.
To this effect, Maruti Suzuki decided to buy out Suzuki Motor Gujarat from its parent company Suzuki Motor Corp., reversing a 2014 deal that allowed SMG to manufacture cars for sale to the company.
“We believe the decision to acquire SMG (including EV manufacturing) simplifies the corporate structure, even though the consideration for the same (Rs 13,000 crore net book value) would entail capital dilution,” Emkay analyst Chirag Jain said.
Growth and valuations
The automaker plans to double its production capacity to 4 million over the next eight years, banking on existing cash reserves of Rs 45,000 crore, it said August 29. The company aims to more than double revenue during this period.
Clearly, the company is ‘Bullish on India’.
While the SMG acquisition does eat into near-term earnings per share, the long-term picture for Maruti Suzuki is a glittering one. Foreign broking firm Jefferies sees demand, product, and margin cycles favourably aligned, driving 28 percent EPS CAGR in FY23-26E.
Maruti Suzuki’s model launch success rate at about 70 percent in the past decade is much higher than the rate of about 14 percent by the competition, broking firm Elara Capital noted. This will aid market share recoupment on new/refreshed SUV model launches in FY24.
In this context, Maruti Suzuki’s P/E of 24x FY24 estimates versus the past 10-year average of 24x is reasonable, brokerages said.