Markets
Is there more steam left in the passenger vehicle segment?
Summary
Some are sceptical about the sustainability of high growth rates ahead. But what remains underappreciated is the growth lever available to the industry in the form of premium product mix. Car buyers are now ditching the entry level models and opting for new premium models.
Maruti Suzuki India Ltd’s ended FY24 on a good note within the passenger vehicle (PV) industry. The company’s overall volume grew by 10% year-on-year last month to 187,196 vehicles even though exports units dropped. Here, domestic PV volumes rose by 15% year-on-year to 152,718.
In comparison, the second largest peer Hyundai clocked about 5% growth in domestic volume to 53,001. Tata Motors also fared well, clocking 14% growth in domestic sales of PVs to 50,110 units.
As such, Maruti’s volume growth last month can be attributed pretty much to the stellar show put up by the utility vehicle (UV) segment, highlighting the preference of consumers. Maruti’s UV volume soared as much as 58% last month to 58,437 units.
Also read: Chart Beat: Passenger vehicle sales to rise in February
Clearly, the company’s UV model launches such as Brezza, Grand Vitara and Fronx have begun to pay off rich dividends.
While Hyundai’s sales mix is dominated by Creta SUV contributing more than one fifth of total sales, Tata Motors is also riding the UV wave by launching new models like Punch CNG, its compact SUV.
As such, the latest monthly sales data reinforces the linear growth story of the PV industry in the post covid era. For perspective, over FY21-24, the combined total sales volume of the three leading automakers (Maruti, Hyundai and Tata Motors) in the PV industry has seen a growth of about 16% on a CAGR (compound annual growth rate) basis.
Sure, some are sceptical about the sustainability of high growth rates ahead. But what remains underappreciated is the growth lever available to the industry in the form of premium product mix. Car buyers are now ditching the entry level models and opting for new premium models.
Notably, sales of Maruti’s entry level cars like Alto have dropped considerably in FY24. Accordingly, the industry’s average sales realization (ASR) has expanded by 8-11% CAGR for the three companies over FY21-23, boosting the gross profit per vehicle.
The ASR in India is still below ₹10 lakh per PV and has the potential to go up further in line with the country’s growing GDP. This should enable PV companies to boost their margins further.
As such, investors looking to participate in the PV growth story in India do not have many options. Though Tata Motors has announced separate listing of the passenger car business and reported IPO plan of Hyundai, Maruti is the only listed pure play PV company currently.
Maruti’s shares hit a lifetime high of ₹12,726.80 apiece last week. Investors are impressed with the company’s smooth ride in terms of financial performance even as new competitors like Kia continue to enter the Indian market.
Maruti has so far maintained its market leadership without sacrificing the profit margin as its gross profit per car has reached an all-time high of ₹1,59,091 in FY23 from ₹1,33,863 in FY21.
Some critics may point out a deceleration in the gross profit margin of the company from 27.7% in FY21 to 26.6% in FY23, but looking at profit margin percentages can be sometimes misleading as it is a mathematical function of numerator and denominator. Profit per car usually reveals a better picture as the selling price may increase or decline based on the fluctuation in raw material price.
Hereon, Maruti’s ability to maintain the industry leading growth will be the key monitorable to justify the upward movement in its shares. Also, the performance of the upcoming product pipeline including the first electric vehicle launch of model EVX in Q4CY24 will be keenly watched.
