Can Jimny, Fronx help Maruti Suzuki reclaim lost market share?

Maruti Suzuki Jimny

Maruti Suzuki investors have a lot of reasons to cheer. For one, it seems like 2023 could be the year when the company is going to reclaim the market share it has been steadily ceding over the course of the last 2-3 years.

The car manufacturer has commanded the lion's share of the market for close to four decades and the dramatic erosion in market share did ring alarm bells for the investors.

With competition growing fiercer by the day, one could hardly blame investors for being sceptical about the company's prospective performance.

The management, however, doesn’t share the scepticism.

Back in August 2022, Chairman of Maruti Suzuki, R C Bhargava, welcomed the market share loss, saying it will jolt the company out of its comfort zone. Now, it seems that the company’s courage under fire might just be starting to pay off.

Jimny, Fronx provide hope

For starters, Maruti Suzuki's latest offerings -- Jimny and the Fronx -- have gathered over 25,000 bookings, which, domestic brokerage house Motilal Oswal believes, will help the company recapture the market leadership position in the SUV segment in FY24.

The latest quarterly results delivered a strong set of numbers, beating analysts' estimates by a long margin. Revenue stood at Rs 29,044 crore, boosting by 25 percent on a year-on-year (YoY) basis, supported by a higher average selling price, which inched up 16 percent, YoY, and 8 percent, QoQ.

Gross margins moved upwards to 27 percent, and operating profit, in particular, grew by a whopping 81.7 percent, YoY, and 2.3 percent, QoQ. Raw material inflationary pressures also seem to have eased and this is abundantly visible in operating profit margins, which ratcheted up from 6.7 percent in December 2021 to 9.76 percent in December 2022, proving that the OEM had managed to slough off the chip shortage and higher commodity prices drag.

Lastly, net profits have been hiking uphill. The Q3FY23 PAT of Rs 2,351 crore has doubled over the last December quarter net profit of Rs 1,011 crore.

Veering towards SUVs

A major driver of the better realisations for the car manufacturer has been the increasing inclination of consumers towards the utility vehicles and the sport-utility vehicles (SUV) segment.

A research report by Crisil states that over two decades, the share of utility vehicles in the overall domestic passenger segment has jumped up from 15 percent in FY2002 to a redoubtable 48 percent in FY2022.

For the auto sector, overall, the share of small cars has declined from 65 percent in FY12 to 45 percent in the first nine months of FY22.

It is the growing inclination towards UVs that prompts Mirae Asset Capital Markets, a brokerage firm, to project a strong 26.4 percent upside for the company.

"We estimate volumes/revenue to grow at a CAGR of 14 percent/20 percent over FY22-25E on the back of market share gains and improved realisations due to the rising share of UVs. Moreover, a change in mix, higher operating leverage, easing commodity cost pressures and cost-saving initiatives would aid margin improvement of 450bps to 11 percent by FY25E. We expect EBITDA and PAT to grow at a CAGR of 43.4 percent/47.6 percent over FY22-25E," a report by Mirae Asset Capital Market states.

HDFC Securities and Angel Broking are also optimistic about the future performance of the company.

Aniket Mhatre, working with institutional research, HDFC Securities, expects the launch of Grand Vitara, Jimny and Fronx to boost the company's market share.

"We expect input costs to remain stable QoQ in Q4 for Maruti. However, we expect EBITDA margin to pick up on the back of operating leverage benefits as we expect Maruti to post 5 percent QoQ volume growth. Even discounts are likely to decline, QoQ. Further, the new launches from Maruti in the UV space (including Grand Vitara, Fronx and Jimny) are likely to help it recover some of its lost market share next year," said Mhatre.

"Jimny, one of the most anticipated SUVs to be launched this year, has definitely managed to create a buzz and interest among buyers. However, the rollout is expected only later in the year. Since the SUV segment has been growing at a fast pace, Jimny, in case it becomes a hit, definitely has the potential to consolidate and shore up the market share of Maruti Suzuki. Indeed, interesting times are ahead as the battle picks pace in the Indian automobile sector," said Amar Deo Singh, Head, Advisory, Angel One Ltd.

The past is the prologue

The recent market share erosion is not the first time that the auto manufacturer has been put through such a trial. Maruti Suzuki saw its own market share dwindle to a worrisome 38.4 percent in FY12 from 46.5 percent in FY09.

Back then, petrol and diesel prices were freshly de-regularised, causing people to opt for cars powered by diesel over petrol, not to mention, the aggressive competition from the likes of Toyota, Hyundai, and Honda, which flooded the market with their entry-vehicle rollouts effectively ramping up competition for the mind space of the Indian car buyer.

As if this wasn't enough, the company was catching bad press for the labour unrest episodes at its Manesar facility. Further, the UV segment was taking off and Maruti Suzuki didn't have much to boast about in this category.

Despite all the headwinds, the company made a smashing comeback, much to the delight of its leadership and investors. The company fought back with its strategy pivoted around premiumisation and spearheaded the launch of its retail outlet, Nexa.

The premiumisation move has yielded a 5 percent CAGR in realisation for Maruti Suzuki over FY12-19, with strong operating margins of close to 15 percent during FY16-18. Coupled with the launch of several models like Baleno, Vitara Brezza, Ertiga, and Ciaz, the company has succeeded in creating market share in the respective segments.

It is a testament to Maruti that in the seven years following FY12, the company delivered a comeback that can be rivalled by very few top dogs. It gained market share every year, peaking at 51 percent in FY19.