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Slip in retail market share hurts pricing power

Maruti Suzuki India’s (MSIL) Q1FY22 earnings were a miss on consensus estimates as EBITDA margin shrunk ~367bps QoQ to 4.6%. Lack of pricing power amidst rising market share pressures is clearly visible (Q1 retail market share dropped to ~40%). Continued product onslaught by competition in SUVs (e.g. Tata HBX, M&M XUV700 launch in Aug/Sep’21) is likely enhance consumer interest, hence keep MSIL’s discounts elevated and price hikes limited.

Consumer preferences continue to rapidly move towards SUV body type (Q1 industry wholesale volume contribution: >39%), which impacts MSIL both at volume and revenue market share levels. Further, the impact of the higher SUV mix on margins is also reflected by Q1 performance of TTMT (India PV) / MSIL (ASP/unit and margins of Rs824k / Rs502k and 4.1%/ 4.6% respectively). Maintain SELL.

* Key highlights of the quarter: Revenues in Q1FY22 declined 26% QoQ to ~Rs178bn due to lower volumes, while ASP was up ~3% at ~Rs502.5k/vehicle (~1.6% price hike taken in Apr’21). EBITDA margins were dragged due to by lower gross margin (~90bps QoQ /RM impact of 3.5%) along with higher employee costs (higher 224bps) which had ~Rs300mn of covid-related expenses. PAT was down ~62% at Rs4.4bn despite higher other income (up 465% QoQ). The partial capitalization of the new Gujarat line also had negative impact on fixed costs.

* Key takeaways from earnings call: Management indicated: a) demand recovery in Jul’21 is underway (bookings at 80-85% of Q4FY21 levels; however; July’21 retail trends were similar to Jun’21); retail market share declined due to: i) higher bookings in CNG and lower availability due to covid (~5% impact), ii) rising SUV category share; iii) lower stock levels at start of lockdown; b) share of first-time buyers fell to 45.4% in Q1 against 46.9% YoY;

c) increase in commodity prices impacted Q1 margins by 3.5% QoQ and the lag effect of increases could continue for a few more quarters; d) MSIL took price hike of ~1.6% in Q1 and a small hike in Jul’21 to partially offset cost inflation (management remains wary of price hikes and its impact on demand and market share); d) capex for FY22: Rs45bn; export revenues for Q1 stood at Rs22.9bn, and discount per vehicle at Rs14k; and e) network inventory levels have increased to ~138k units currently (27 days: normal: 135k-140k units) with an order backlog of ~170k units in Q1.

* Maintain SELL: Globally, both customers and regulators are opting to align towards BEVs over ICE (e.g. Europe/China), and companies that are facilitating the change are being rewarded by investors by way of superior valuations. Hence, MSIL’s potential inertia to not proactively pivot towards EVs could aid challengers in gaining higher customer mindshare, eventually EV market share. We prune our EPS estimates (-6.8% / -1.1% FY22E / FY23E, respectively), maintain our target multiple at 24x FY23E core EPS of Rs154 (earlier: Rs157), and add cash per share of Rs1,549 to arrive at our target price of Rs5,242 (earlier: Rs5,339). Maintain SELL.

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