Sunday, July 21, 2024

India’s fortunes are tightly intertwined with Maruti’s

In 1953, when Charles Wilson, a former CEO of General Motors was appointed secretary of defence by President Eisenhower, he said at his confirmation hearing, “What’s good for General Motors is good for America and vice-versa… Our contribution to the nation is quite considerable.” A similar statement could be made about Maruti Suzuki (MSIL) vis-a-vis India, despite the fact that the promoter is Japanese.

Automobile manufacturing has a very long value-chain. Cars have thousands of parts, so inputs include everything from metals to electronics, plastics, glass and leather. Moreover, marketing and selling a car involves service sectors such as advertising and finance, and repair and maintenance functions are needed to keep it running. Put this all together and making and running a car creates plenty of jobs for both skilled and unskilled workers across sectors.

Popular vehicles like Marutis – the “people’s car” – are also bellwethers for consumption. Maruti holds a roughly 40% marketshare across all four-wheel vehicles and more than 50% in the economy segment. If sales are strong, that’s an indication the middle class is doing well.

The four-wheeler sector has started seeing growth in volumes, especially in the crucial economy segment. MSIL could be a big beneficiary. The company’s stock has been in the news since the launch of the Invicto SUV pushed it past 10,000. Granted that’s just an arbitrary round number, but demand appears strong with a backlog of several lakh orders.

MSIL is likely to beat the market in terms of growth. Its range starts at less than 4 lakh for the WagonR and crosses 25 lakh for high-end SUVs, which means it now straddles several segments of the market. Sales in June 2023 grew to 1.33 lakh vehicles, representing 40% marketshare and 8.4% growth over June 2022, when it sold 1.22 lakh vehicles. Overall, car sales grew to 3.28 lakh, up 2.5% from 3.20 lakh in June 2022.

MSIL, which can currently build around 22.5 lakh vehicles a year, will increase this capacity by 10 lakh with 8,000 crore of capex in FY24. It also expects a rise in CNG-vehicle orders after the latest price-setting policy, which reduced CNG costs.

The company hopes for improved chip supplies after three years of issues but admits that persistent problems may continue to affect production for the next six months. (MSIL estimated a loss of production of 170,000 units in FY23 owing to chip shortages). But lower costs of rare-earth metals, plastics and petrochemical products should lead to better margins.

However, there is strong competition in this space and manufacturing costs could increase if a new airbag mandate is implemented. There’s another potential shadow on this front, with China placing export controls on two key metals used in semiconductors. This could lead to yet another round of chip shortages.

There are rumours that the company is looking at launching a purely electric vehicle with high-end features (550 km range, 60 kWh battery, fast charging and more) in October 2024.

MSIL hopes to increase its penetration in CNG (currently around 20%) and its SUV marketshare to 25% in FY24 from 11% in FY23 with a new SUV range. The Q4 FY23 results showed higher operating revenues of 32,048 crore, (up 20% YoY and up 10% QoQ). Raw-material costs were up 19% YoY and 11% QoQ. Ebitda rose 38% to 3,350 crore but the margin was almost flat at 9.1%. PAT was 2624 crore, up 43% YoY and 12% QoQ. Q1 FY24 should be better on the cost front.

The stock has seen quite a lot of FPI buying and is up 15% in the past 12 months. Most industry watchers expect MSIL to gain marketshare through FY24 and to raise realisations. As the company increases its marketshare in the SUV segment, the average selling price per unit will rise (the Invicto is priced at more than 24 lakh).

If there’s demand for MSIL’s vehicles, that’s a sign of rural income rebound or at least of rising confidence amongst middle-income buyers in the rural and semi-urban segments. This data is usually highly correlated with GDP growth.

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Updated: 07 Jul 2023, 01:11 PM IST

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