If someone told you a couple of years ago that Mahindra’s SUV Scorpio would one day outsell Maruti Suzuki’s entry-level hatchback Alto, you may have questioned their sanity. But the unthinkable actually happened in FY24, when 1,41,462 Scorpios (both the N and classic models) were sold, compared to 1,11,955 Altos, revealing a tectonic shift in the Indian automotive market.
Does this mean Maruti Suzuki has handed over its crown to the competition? Far from it. India’s largest carmaker ended FY24 with its highest-ever unit sales and net profit, both for the fourth-quarter and the financial year. It also led India's passenger-vehicle exports in FY24 for the third year on the trot.
But as car enthusiasts know only too well, a gleaming machine can sometimes be hiding several niggles under the hood. The company’s Q4 numbers were a case in point. Its earnings before interest, taxes, depreciation, and amortisation (Ebitda) grew 40% year-on-year to ₹4,685 crore but missed analysts’ estimates. More importantly, the Ebitda margin of 12.3% trailed consensus estimates of 12.8%. The margin miss was led by a one-off 60-basis-points impact related to CSR and material costs, coupled with reduced CNG vehicle production owing to a shortage of components.
The lower CNG mix (26.9% in Q4 from 30.8% in Q3) and higher share of entry-level vehicles also weighed on the company’s average selling price (ASP), which dropped 1.5% sequentially to ₹6,54,672.
CNG forms a key component of Maruti’s operational flywheel. CNG vehicles have higher selling prices and margins than Maruti’s mainstay, mini and compact vehicles (which account for 52.4% of its total sales). The company commands a 70% share of the CNG vehicle market and around 20% of its overall sales come from CNG models.
While analysts are confident that the lower CNG mix will reverse this quarter, the bigger risk to the company is the raging trend in SUVs, which shows no signs of cooling. From less than 30% in FY18, SUVs now account for the biggest portion of the domestic car market at 50.4%. Robust demand for SUVs made India the world’s third-largest passenger-vehicle market in FY24, with sales crossing 40 lakh for the first time.
Maruti Suzuki, which ushered in the small-car revolution in India, was initially caught unawares by the SUV craze. As late as 2022 its share in the SUV market was a paltry 9.5%, even trailing South Korea’s Kia, which had entered the market only in 2019.
However, thanks to a slew of launches and its global partnership with Toyota, Maruti overtook Mahindra to become the country’s largest SUV maker in the first half of FY24. Its current SUV market share stands at about 22%, and the company is targeting 50% in the next few years.
But analysts say this is easier said than done.
Hyundai, Tata Motors, M&M and other carmakers are aggressively expanding their SUV lineups. At the premium end, high-tech EVs from global brands are luring buyers.
Maruti is no stranger to the effects of increased competition, having seen its market share erode to 41% from a peak of 51% in FY19. On the operational front, commodity prices are likely to increase marginally in FY25, particularly steel (10-11% of Maruti’s net sales), aluminium (3%) and copper (1%).
The company is also facing headwinds in its bread-and-butter mass-market segment. First-time buyers stood at 40-43% in FY24. The company management said it was not seeing any recovery in this segment, and thus the FY25 and FY26 outlook for small cars seems stressed.
And after a 24% run-up so far in 2024, analysts are advising investors to temper their near-term expectations from Maruti Suzuki shares. The number of ‘buy’ calls on the stock has dropped from 38 at the start of the year to 34, according to Bloomberg data.
That said, it would be foolhardy to write off a company with the pedigree of Maruti Suzuki.
“We feel the concerns over the car industry’s growth slowdown are short-term in nature as interest rates peak while the feel-good factor continues from strong returns generated by different asset classes,” analysts at InCred Equities said in a note.
“Maruti Suzuki is better placed in the short term to ride this slowdown by debottlenecking CNG vehicle supply chain and meeting the long waiting period. The new EV launch in early CY25F should ease technology transition risk,” they added.
