Maruti Suzuki || Best positioned to ride the upcycle

Maruti Suzuki

Best positioned to ride the upcycle

Underpenetrated category

India is a highly underpenetrated market in terms of 4W per household. Overall, only 16 per 1000 own cars in India.

Exponential growth opportunity given lost decade and potential GDP per capita expansion

This past decade, India’s passenger vehicle volume growth has been lower than mature and developed markets like the US, China.

And what we have seen is that, once a country’s per capita income crosses a threshold where the majority of the country is able to earn more than for basic needs, the vehicle penetration grows exponentially. India is still in that phase of tepid penetration levels and the coming decade could well be the one that pushes vehicle penetration levels exponentially.

Apart from the tremendous growth potential, since this is a cyclical industry, the entry point matters quite a bit too. Ideally, one should enter 1-2 yrs into the downcycle and position for the next cycle which could play out for 4-5 years. We do seem to be at one such point in time, where we see that the growth in the industry is lower than its average. One point to note is that the demand revival is very much visible post-Covid, but it is the supply constraint in terms of semiconductor shortages that is causing low levels of growth still. In the next 1-2 years when supply challenges are sorted out, this growth could come in as pent-up demand.

Business Overview

Maruti Suzuki is the leading 4-wheeler manufacturer of India, with approx. 50% market share. The portfolio of the company is largely focused on entry-level cars. 5 of the top 10 best selling cars are Maruti’s.

Apart from selling its own cars domestically, Maruti is now focusing on exports. Also, based on an agreement between Toyota and parent Suzuki, they also do cross-badging and cross-production of cars. For example, Baleno’s equivalent Toyota Glanza is produced in the Suzuki plant in Gujarat. In the future, select future Toyota models will also be sold under the Maruti badge.

Strong market position given expanding sales network and best-in-class ease of maintenance

Over the years, Maruti Suzuki has consistently increased its market shares over the last decade.

Strong sales network

The company has the largest and deepest sales network in the country covering 2800 dealers for passenger vehicles and 1992 cities.

Best-in-class Rural network

Over the years, the company has especially focused on building its rural footprint and today, more than ⅓ of its sales come from rural areas.

Ease & low-cost of service

Maruti is usually the most preferred company when it comes to first-car buying for families given its vast sales & service network but also the low cost of servicing the vehicle.

Industry consolidation and share gains

Whenever an industry goes into a downcycle, it is usually the leaders of the industry which consolidates market share and is best positioned in protecting profits. It is no different in the last decade. Many foreign companies like General Motors, Volkswagen, Ford, Fiat have de-prioritised the Indian market given its inability to penetrate the market and gain shares. On the other hand, Maruti has been consistently gaining share over the same period.

Also, another point to note is that, when there is a downcycle, it is usually the small cars which take a larger beating, because these are the vehicles bought more often by the lower and middle income households and the larger cars are usually affected lesser. This trend is also visible in this downcycle, as premium hatchbacks and compact SUVs have gained share at the expense of entry-level hatchbacks.

Shift to petrol, CNG and premiumisation

Another trend which has helped Maruti is the shift towards petrol and of late, CNG vehicles. Since the government deregulated diesel prices, the gap between petrol and diesel has been narrowing, leaving the petrol vehicles with the lower cost of ownership given its low upfront cost.

With the fuel prices continuously rising, the shift to CNG vehicles is also happening quite fast. From a share of 5% of company sales in FY17, it is expected to contribute to 17% of Maruti’s sales in the current fiscal. CNG has a running cost of 1.5/km vs petrol at 5/km, which has accelerated the growth of CNG vehicles.

Both these trends have helped Maruti given its strong portfolio of petrol and CNG vehicles. It is only recently that other companies are warming up to launching CNG variants.

Operating leverage when cycle turns

The auto industry is a high fixed-cost business and whenever the cycle turns and volume picks up, margins pick up. Currently, the margins for Maruti are around 1/3rd of its last cycle peak. A good portion of it is also because of commodity price increases, but there is a high proportion of under-utilized assets which are still consuming expenses in spite of lower volumes.

Low capacity utilisation currently

Hence, high fixed cost % of sales currently

Which in turn, is affecting current EBITDA margins (apart from commodity price increases)

And suppressing return ratios

Risks

  1. Any delay in industry turnaround
  2. Maruti’s biggest weakness over the last few years has been the lack of a formidable SUV line-up. SUV’s share of vehicles have grown considerably over the last decade and if Maruti fails to address this product gap, it could come back to bite them big.

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  1. Maruti’s strategy in terms of fuel source is CNG vehicles for small vehicles and hybrids for mid and premium vehicles. Today, EVs still contribute to only 0.1% of annual car sales. Any faster than anticipated move towards electric vehicles could result in market share losses for Maruti.
  2. Commodity price increase over the last year has considerably eroded margins for all auto companies. Eventually, a good part of the increase will be passed on to the consumer. But, any continuance of the accelerated commodity price increases like last year could lead to depressed margins or low demand levels because of passing on price increases to the consumer too soon.
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