1 week Ago
Maruti Suzuki India Ltd’s sales volume update for December sprung a positive surprise on small, entry-level cars, which saw 29% year-on-year growth to 62,324 vehicles. This is much higher than the 21% year-on-year growth in the company’s utility vehicle (UV) sales even though the base for both segments was more or less the same. In the context of the ongoing trend towards UVs and other premium vehicles, the superior growth in small cars was entirely unexpected.
If the trend continues, Maruti's stock could regain some of its lost momentum. It’s important to note, however, that December was the first month in FY25 in which small cars posted year-on-year sales growth. The segment is hugely important for the company, accounting for 50% of its total passenger vehicle sales in India in the first nine months FY25 (April-December).
Overall sales numbers for Maruti were flat at 12,75,634 units over this period, despite 15% growth in UVs, as sales of small cars dropped 10%. Also read: Small cars are preferred by first-time buyers, especially in rural areas, because of their low prices. Maruti’s high growth rate in this segment may be another sign of a recovery in demand in the rural economy.
Maruti’s management also alluded to the higher sales in rural areas during the festival season in an earnings call announcing its results for the first half of FY25. While increased rural demand may have played a part in ensuring higher volumes, the company’s efforts to revitalise the small-car segment shouldn't be underestimated. An example of this was the introduction of the fourth-generation Swift with automatic transmission, which had a new engine with about 14% better fuel efficiency than its predecessor.
The company also launched innovative financing schemes to boost sales, as it believes household income has been growing more slowly than car prices. Primed for rural demand revival True, one month's data isn’t sufficient to conclude that this is a trend. But the fact remains that Maruti is best-positioned to capitalise on a revival in rural demand owing to its strong portfolio of low-priced cars and extensive sales network comprising 3,863 dealers.
Hyundai, the other pureplay passenger car company, has a much smaller reach with 1,377 sales outlets. Also read: December sales were announced during market hours on Wednesday. While Maruti’s stock is up 8% over the past two trading days, it is still far from the high of 13,680 it touched on 1 August.
The stock had been sliding since then as the company had a subdued first half of FY25 with a 3% decline in domestic passenger vehicle sales volume because of several factors such as elections and a general slowdown in the auto industry. Maruti’s profits could increase from here because of two factors: the revival in small-car sales and price hikes of up to 4% across models, effective January. The company’s material cost per vehicle increased by about 4% year-on-year in the September quarter, largely due to commodity price pressures.
With the recent price hikes, gross margin per vehicle should increase, raising the Ebitda margin. Keeping in mind the potential of higher profitability, the stock’s valuation appears reasonable at 22 times FY26 earnings per share, based on Bloomberg consensus estimates. Also read:.
