Steering through 2024 won't be easy for Maruti

Maruti Suzuki India Ltd is walking the talk. It is making steady progress towards achieving its target production capacity of 4 million units per annum by FY2031. On Wednesday, the automaker announced two capacity additions in Gujarat entailing a total investment of 38,200 crore. One is a new automobile production plant with an annual capacity of 1 million units, expected to start operation in FY29.

The other investment would increase Suzuki Motor Gujarat Pvt. Ltd’s (Maruti’s wholly owned subsidiary) annual production capacity to 1 million units from 750,000 units currently. This is to meet the potential increase in electric vehicle demand. Sure, this augurs well from a long term perspective.

But in the foreseeable future there are bumps on the road as the passenger vehicle industry is expected to slow in 2024. Normalization in the supply chain has led to huge pending orders being met, which means a falling order book. Moreover, inventory levels are elevated. As per the Federation of Automobile Dealers Associations, the average inventory for personal vehicles in December ranged from 55 to 58 days, or about two months.

Adding to the woes for Maruti is that the entry level segment is still suffering. Maruti derives a large portion of its volume from the mini and compact cars segment–about 46% of its portfolio in FY24 (till December). True, Maruti is expanding its offerings and capitalizing on the premiumization trend by launching utility vehicles.

It introduced utility vehicles such as Fronx, Jimny and Invicto in 2023. But the intensifying competition from the likes of Ltd and Mahindra & Mahindra Ltd is keeping Maruti’s market share in check. For perspective, Maruti’s market share in the personal vehicles segment stood at 42% in the first half of FY24, roughly in line with the levels seen in FY22 and FY23, according to Jefferies India.

In fact, Maruti’s management estimates the personal vehicles industry to see muted single digit growth in 2024 as the pent up demand seen after the pandemic has been met. Plus, high interest rates would be a drag on demand. “With the best of the sport utility vehicle product upcycle largely behind for Maruti and absence of any revival in small cars, outlook seems muted (prompting about 3%/7% cut in FY24/FY25 26 volumes)," said Emkay Global Financial Services in a report on 8 January.

The broking firm expects Maruti’s core earnings per share to grow at a slower pace and sees the company clocking a compound annual growth rate of about 9% over FY24 26, versus a 21% year on year rise in FY24. In the December quarter (Q3FY24), Maruti’s revenue and margin should grow year on year.

But sequentially, these metrics are likely to fall due to factors such as 9% drop in volume, higher discounts in the small car segment, and slight deterioration in the mix. In Q2, Maruti’s revenue and Ebitda margin had stood at 37,062 crore and 12.9%, respectively. Over the past year, Maruti’s shares are up by nearly 22% aided by new launches.

But “2024 is likely to be a period of consolidation for Maruti. With no major launches lined up this year except for its first electric vehicle by the end of 2024, (the) stock lacks near term upside triggers," said Aditya Welekar, senior research analyst at Axis Securities. Thus, amid rising competition, sustaining market share in the utility vehicle segment will be essential.

Moreover, there are not enough levers on the margin front either. With stable commodity prices, margin improvement would have to come through cost saving measures and a favourable mix. How that pans out is another parameter to watch..