The Maruti Suzuki stock closed 4 per cent lower on Tuesday following weak revenue growth, contraction in operating margins and a dip in profits in the quarter ended September 2024, over the same period last year.

Lacklustre domestic volumes -- thanks to the cyclical downturn firming up in the passenger vehicle (PV) industry -- affected the topline. Despite a 2 per cent rise in average realisations and richer product mix from higher proportion of utility vehicles (UVs), topline growth stood at a mere 0.2 per cent y-o-y to ₹35,589 crore. While export volumes provided some support, domestic volumes fell 3.9 per cent y-o-y, resulting in an overall volume contraction of 1.9 per cent for the period.

Raw material cost as a percentage of sales moved up by 140 basis points y-o-y to 74.9 per cent. Higher sales promotion expenses and weak topline, too, weighed on the margins. Operating margins stood at 11.9 per cent versus 12.9 per cent a year ago. Margins have dropped below the 12 per cent mark for the first time in three quarters.

Apart from weak operational performance, a one-time provision (₹837 crore) for deferred tax liability arising from change in tax treatment of debt mutual funds further hurt the bottom line, with profits plunging 17.4 per cent to ₹3,069 crore.

Outlook

The slowdown in the PV industry is becoming well-entrenched, with the overall industry wholesale volumes growing only by 0.5 per cent in H1FY25. Maruti was worse off in this period, with a 3.3 per cent fall as it gets 60 per cent of its revenues from segments such as the Mini, compact, mid-size cars and vans, which are bearing the brunt of the slowdown. What is helping cushion the blow is UV sales, which have grown at a healthy 12-13 per cent for the industry, as well for Maruti so far in FY25. In the light of stiff competition in the segment, sustaining growth here will be key for its earnings in the next few quarters. What can also provide more succour -- at least in Q3 -- is festival season sales. According to the management, the company has seen a good 14 per cent y-o-y growth in retail sales from the beginning of Shradh till date, and it expects to end this month with an inventory of just one month or lower.

The Maruti Suzuki stock is now 20 per cent lower than its one-year high of ₹13,680 and it trades at about 24 times its trailing earnings. What makes it interesting for investors is that Hyundai, another pure play PV maker, is now listed and is also trading at around the same levels. The company gets 68 per cent of its revenues from UVs, compared with Maruti’s 40 per cent. Hyundai’s Q2 results and management commentary will be keenly watched. How both the companies navigate the slowdown will determine the direction for the stocks and investor preferences hereon.

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