Q4FY23 Review: Maruti Suzuki: New model success key for stock performance

27 Apr 2023 , 01:33 PM

Maruti’s Q4 results were slightly weaker than expected (3% Ebitda miss) owing to lower gross margin. Volume growth rate at the PV industry level is likely to moderate substantially in FY24 compared to FY23. However, Maruti has a busier model launch pipeline in FY23-FY24 relative to its recent history and compared to competition. If these models click, there is a strong case to grow faster than the industry. External gross margin tailwinds (input costs, currency) are behind us. Further margin expansion from current levels would depend on market-share improvement (hence, better pricing) and internal efficiencies.

Q4 slightly weaker than expected: 

Q4 revenue grew 20% YoY, driven by 5% volume growth and 15% jump in ASP (prices hikes, mix). Gross margin (GM) contracted 60bps QoQ to 26.7% (110bps miss). Ebitda margin improved 70bps QoQ to 10.5% (est. 10.8%), driven by operating leverage. Absolute Ebitda missed by 3%, while PAT missed by 2%.

Industry growth to decelerate; new models may help Maruti outperform: 

As analysts of IIFL Capital Services have highlighted in their previous reports (link), they expect sharp deceleration in industry volume growth (7% in FY24 vs 27% in FY23). Maruti’s market-share came off over FY20-23 due to: i) weakness at the low-end of the market, ii) industry shift to SUV, iii) light new model launch pipeline. Looking ahead, Maruti’s launch pipeline is busier compared to competition. If these new models click, there is a strong case for Maruti to grow faster than the industry.

External margin tailwinds behind us; Market-share improvement and internal efficiencies critical for margin expansion: 

FY23 saw gross margin improvement driven by fall in commodity prices and favourable JPY-INR on imports. However, these benefits are fully factored in H2FY23 results. From here, input costs may inch up, led by steel. JPY has appreciated in recent times and may not be a tailwind any more. As a result, Maruti will have to drive margin expansion with better pricing (which is possible with market-share gains) and internal cost efficiencies. They have trimmed margin assumptions slightly following Q4 results. Analysts of IIFL Capital Services revised FY24 margin of 10.5% is similar to what was achieved in Q4FY23.