Automotive OEM's - Passenger Cars: Q2-25 Performance & Outlook
Muted demand & high inventory. SUVs & CNG drive growth. EV's maintain momentum. Festive season provides relief. Supply chain constraints persist
Table of Contents
Overall Performance in Q2 FY25
Financial Results of Indian Automakers: Mixed Picture
Demand Environment
Product Mix Strategies
Pricing Strategies and Margin Performance
Insights for Investors in Indian Automobiles
Sources
1. Overall Performance in Q1 FY25: Muted Demand
1.1 TLDR
Muted Demand and High Inventory: The overall demand in the passenger vehicle (PV) segment slowed down, leading to high inventory levels across the industry. This resulted in increased discounting to clear stocks.
SUVs and CNG Vehicles Drive Growth: While the small car segment struggled due to affordability concerns, SUVs remained popular. The CNG segment also witnessed robust growth, driven by the expanding CNG infrastructure and rising petrol prices.
EV Segment Maintains Momentum: Despite the withdrawal of certain government subsidies, the personal EV segment continued to grow. Tata Motors remained the market leader in this segment, while M&M and Maruti Suzuki are gearing up to launch new electric SUVs.
Festive Season Provides Relief: The festive season leading up to Diwali brought much-needed relief to the industry, with manufacturers reporting strong retail sales. However, concerns remain about the sustainability of this demand in subsequent quarters.
Supply Chain Constraints Persist: Supply chain disruptions continued to plague the industry. Notably, Tata Motors' JLR division faced production challenges due to a flood at a major aluminum supplier, impacting its Q2 performance. Semiconductor shortages also continued to affect the industry.
1.2 Key Themes
Festive Season Demand: All three companies experienced robust demand during the recent festive season in India. Mahindra & Mahindra and Maruti Suzuki reported strong double-digit retail growth, with Maruti Suzuki expecting a 14% YoY increase. Tata Motors achieved its highest-ever monthly registrations in October.
Inventory Management: Inventory levels remain healthy across the board. Maruti Suzuki boasts less than one month of inventory, while Mahindra & Mahindra dealers hold comfortable stock levels. Tata Motors significantly reduced its inventory, bringing it down to 30-31 days.
Rural vs Urban Demand: While overall demand is positive, a clear trend emerges showing stronger growth in rural markets compared to urban areas. This trend is particularly evident in the tractor and entry-level SUV segments.
Electric Vehicle Transition: The shift towards EVs is gaining momentum. Maruti Suzuki is gearing up for its first EV launch, focusing on a high-spec model with a 60 kWh battery. Tata Motors continues to dominate the EV market in India and witnessed a 20% penetration of EV bookings for its new Curvv model. Mahindra & Mahindra is cautiously optimistic about EV adoption, acknowledging it will take time for the new category to achieve the same level of enthusiasm as ICE vehicles.
Pricing and Margins: Companies are facing pressure on margins due to discounting and volatile commodity prices. Mahindra & Mahindra and Tata Motors strategically cut prices to stimulate demand and maintain market share. Despite these challenges, Tata Motors reports improving profitability in its EV business.
2. Financial Results of Indian Automakers: Mixed Picture
Each company experienced a unique set of challenges and successes during the quarter.
2.1 Mahindra & Mahindra (M&M)
M&M had a strong Q2 FY25, with consolidated Profit After Tax (PAT) up 35% year-on-year to ₹3,171 crores. This strong performance was driven by:
Robust performance in Auto and Farm segments: Both segments saw significant growth in market share and profit margins. Capacity expansion in the auto segment also contributed to the positive results.
Growth in Services: The Services segment, which includes Tech Mahindra and Mahindra Finance, recorded an 80% growth in PAT.
Exceptional performance of Growth Gems: Growth Gems, including the renewables business Susten, exceeded expectations, contributing to a 72% increase in profit excluding revaluation gains from the previous year.
Challenges:
Stress in international subsidiaries: M&M's Farm segment faced challenges in international markets, particularly in North America and Turkey, due to industry degrowth and hyperinflation, respectively.
Outlook:
Positive outlook for H2 FY25: M&M expects strong growth in the second half of FY25, driven by robust domestic demand in the Auto and Farm segments, and continued growth in the Services segment.
Focus on balancing growth and margin: The company aims to strike a balance between growth and profitability by making strategic decisions, such as the price cut on the XUV700, to maintain volume growth and market share.
2.2 Maruti Suzuki
Maruti Suzuki reported mixed Q2 FY25 results, with a decline in domestic sales volume and a slight dip in operating profit margin. However, the company achieved its highest ever Profit Before Tax (PBT).
Highlights:
Strong festive season performance: Maruti Suzuki saw a 14% year-on-year growth in retail sales during the festive period.
Growth in CNG vehicle sales: CNG vehicles accounted for one in three cars sold in the domestic market, reflecting increasing consumer preference for this fuel type.
Exports continue to grow: The company maintained healthy export sales growth, commanding a 40% share of India's total passenger vehicle exports in Q2 FY25.
Challenges:
Muted demand for passenger vehicles: The overall demand for passenger vehicles in India remained muted, leading to a decline in domestic sales volume.
Higher sales promotion expenses: Increased promotional expenses impacted operating margins.
Outlook:
Focus on maximising retail sales in Q3: The company aims to maximise retail sales in Q3 by focusing on customer-centric initiatives and events.
Stable discounts anticipated: Discounts are expected to remain stable for the rest of the year.
Positive outlook for CNG vehicles: The company is optimistic about the growth potential of CNG vehicles, driven by factors like expanding infrastructure and increasing consumer acceptance.
2.3 Tata Motors
Tata Motors faced a challenging Q2 FY25, reporting a decline in revenue and a drop in operating profit margin. The company attributed this to supply issues at JLR and the ongoing subdued demand in the Indian market.
Highlights:
Robust profitability at JLR despite supply challenges: JLR maintained robust profitability, posting its ninth consecutive quarter of positive EBIT.
Strong performance in the US market: JLR's performance in the US market continued to be strong, reflecting the growing brand strength and product appeal in the region.
Tata Motors maintains leadership in the Indian EV market: Despite industry headwinds and policy changes, Tata Motors continued to lead the Indian EV market.
Challenges:
Supply chain disruptions at JLR: JLR's production was significantly impacted by a flood at a key aluminum supplier and a temporary quality hold.
Stress in the Chinese market: JLR experienced challenges in China due to industry-wide discounting, overstocking, and weakening demand.
Slowdown in Indian passenger vehicle market: The overall slowdown in the Indian passenger vehicle market impacted both ICE and EV sales.
Outlook:
Anticipated rebound in JLR wholesales: JLR expects a strong rebound in wholesales in H2 FY25 as supply chain challenges ease.
Cautious outlook for Indian market: Tata Motors remains cautious about the near-term demand in the Indian market but expects the festive season and government infrastructure investments to provide some support.
Intensified focus on cost reduction and EV mainstreaming: Tata Motors will focus on cost reduction efforts and initiatives to mainstream EVs in the Indian market.
2.4 Overall:
The Q2 FY25 results for M&M, Maruti Suzuki, and Tata Motors reflect a mixed picture of the Indian automotive industry. While the festive season provided a boost to demand, underlying challenges remain, including supply chain disruptions, muted demand in certain segments, and increasing competition in key markets like China.
3. Demand Environment
3.1 Passenger Vehicles
Muted demand: The demand for passenger vehicles in India remained subdued in Q2 FY25.
Festive season boost: The festive season, which typically runs from the start of Shradh to Diwali, has seen a surge in demand. Maruti Suzuki reported a 14% growth in retail sales during this period.
Rural outperforming urban: Rural demand is currently outperforming urban demand. Maruti Suzuki is even expanding its Nexa outlets in rural areas to cater to this demand.
SUVs driving growth: SUVs continue to be the preferred choice for consumers, with sales growing from 50% to 54-55% of the market. The small car segment, however, is experiencing a decline.
3.2 Electric Vehicles
Growth impacted by industry slowdown and policy changes: The growth of the EV industry in India has been impacted by the general slowdown in the passenger vehicle industry and the withdrawal of certain subsidies, particularly in the fleet segment. The discontinuation of the FAME2 incentive has significantly impacted the fleet segment.
Tata Motors maintains market leadership: Despite these challenges, Tata Motors has maintained its market leadership in the EV segment, holding a 67% market share in the personal segment.
Stable pricing anticipated: The volatility in EV prices, primarily driven by fluctuations in battery cell prices, is expected to stabilize going forward.
3.3 Tractors
Positive rural sentiment: There is an uptick in rural sentiment, which is expected to drive tractor sales.
Reservoir levels bode well for FY26: The high reservoir levels in India, following a good monsoon season, are a positive indicator for agricultural sentiment in FY26. This is expected to translate into continued growth in the tractor market.
International market challenges: International tractor markets are facing challenges, with the North American market shrinking significantly due to industry degrowth and hyperinflation in Turkey impacting accounting numbers.
3.4 Commercial Vehicles
Industry decline: The commercial vehicle industry in India experienced an 11% year-on-year decline in Q2 FY25, largely due to a slowdown in infrastructure projects and reduced mining activity.
Festive season recovery: Similar to the passenger vehicle market, the commercial vehicle segment saw an increase in demand during the festive season, with a 30% month-over-month growth in volumes.
Growth expectations for H2: The passenger commercial vehicle segment (buses and vans) is expected to see the highest growth in the second half of FY25, followed by intermediate and light commercial vehicles.
3.5 JLR in China
Industry-wide discounting and overstocking: The Chinese automotive market is experiencing industry-wide discounting and overstocking, putting significant stress on the retailer network.
Demand challenges: There are demand challenges in both the overall industry and the specific segments where JLR operates, with the premium market down 12% and the ICE market down 22%.
Impact on JLR sales: These factors are expected to impact JLR sales in China in the second half of FY25.
Competition from Chinese OEMs in Europe: While Chinese OEMs are increasingly looking to compete in the European market, their current focus is primarily on the lower end of the market, which may have limited impact on JLR's positioning.
Overall, the earnings call present a mixed picture of the demand environment across different industries. While there are signs of recovery in some sectors, particularly during the festive season, challenges remain in others, particularly in international markets and in the face of increasing competition.
4. Product Mix Strategies
4.1 Mahindra & Mahindra (M&M)
M&M's product mix strategy focuses on capitalizing on its strong presence in the SUV and tractor segments while expanding its EV offerings.
SUVs: M&M has seen strong success with its new SUV launches, including the Thar and the XUV700. The company is even facing capacity constraints for some of its ICE models due to higher-than-expected demand. To address this, M&M is increasing the fungibility of its production lines and plans to further evaluate its ICE manufacturing footprint.
Tractors: The tractor segment remains a core strength for M&M, with consistent market share growth. The company aims to further enhance its position in this segment by addressing inventory challenges and capitalising on the anticipated growth in rural demand.
Electric Vehicles (EVs): M&M is making significant investments in EVs through its dedicated subsidiary. The company plans to launch two new electric SUVs, the BE 6e and XEV 9e, in early 2025. While acknowledging that EVs are a new category that may take time to gain traction, M&M is confident in the potential of its upcoming EV offerings.
M&M's focus on a balanced product mix is evident in its emphasis on both ICE and EV capacity expansion. The company recognises the continued demand for ICE vehicles while simultaneously investing in the future of electric mobility.
4.2 Maruti Suzuki
Maruti Suzuki's product mix strategy centres on maintaining its dominance in the entry-level car segment while expanding its presence in SUVs, CNG vehicles, and eventually, EVs.
Entry-level Cars: While the small car segment is facing challenges, Maruti Suzuki remains committed to this segment, which is crucial for its overall market share. The company has employed strategies like launching limited editions and offering discounts to revitalize demand in this segment.
SUVs: Maruti Suzuki acknowledges the growing popularity of SUVs and is expanding its SUV portfolio. The success of models like the Grand Vitara and FRONX demonstrates the company's ability to compete in this segment.
CNG Vehicles: Maruti Suzuki is aggressively promoting CNG vehicles, capitalising on the expanding CNG infrastructure and increasing customer acceptance. With 14 S-CNG models, the company offers the widest CNG vehicle portfolio in India.
Electric Vehicles (EVs): While Maruti Suzuki has been relatively late to the EV market, the company is preparing to launch its first electric SUV. Maruti Suzuki aims to leverage its strengths in cost optimization to offer a competitive EV product in the Indian market.
Maruti Suzuki's product mix evolution highlights its adaptability to changing consumer preferences. The company is balancing its focus on traditional segments with strategic investments in emerging technologies like CNG and EVs.
4.3 Tata Motors
Tata Motors is pursuing a multi-pronged product mix strategy, focusing on SUVs, EVs, and commercial vehicles, to cater to diverse customer segments.
SUVs: Tata Motors is strengthening its SUV portfolio with new launches and upgrades. The company has seen success with models like the Nexon, Punch, and the recently launched Curvv. Tata Motors plans to further expand its SUV offerings to achieve a higher sales penetration in this segment.
Electric Vehicles (EVs): Tata Motors is the current market leader in the Indian EV market. The company is committed to expanding its EV portfolio, with plans to launch models like the Harrier EV and the Sierra EV. Tata Motors is also taking steps to improve the affordability of EVs by passing on benefits from battery price reductions to customers.
Commercial Vehicles (CVs): Tata Motors is a leading player in the Indian commercial vehicle market. The company is focusing on enhancing its offerings in various CV segments, including heavy trucks, light commercial vehicles, and buses. Tata Motors is also leveraging its digital platform, Fleetedge, to provide value-added services to its CV customers.
Tata Motors' diverse product mix reflects its comprehensive approach to the Indian automobile market. The company is leveraging its expertise in various segments while simultaneously focusing on the future of electric mobility.
4.4 Overall
These three companies illustrate the dynamic nature of the Indian automobile industry, where companies must constantly adapt their product mix to stay competitive. Key factors driving these adjustments include:
Evolving Consumer Preferences: The Indian market is witnessing a shift towards SUVs, CNG vehicles, and EVs, driven by factors like fuel efficiency, environmental concerns, and government incentives.
Intensifying Competition: The entry of new players, especially in the EV segment, is increasing the competition, forcing established companies to innovate and offer competitive products.
Technological Advancements: The rapid pace of technological advancements, particularly in the EV space, is compelling companies to invest in research and development and bring new products to market.
The evolving product mix strategies of these leading Indian automobile companies provide valuable insights for investors, highlighting the key trends and challenges shaping the industry's future.
5. Pricing Strategies and Margin Performance
5.1 Mahindra & Mahindra (M&M)
M&M addressed concerns about its decision to reduce the price of the XUV700. The company explained that the price cut was a strategic move to make the brand more accessible and boost sales volumes. The decision was based on a combination of factors:
Reduced Input Costs: M&M benefited from declining commodity prices, particularly for chips, which had previously inflated costs during the semiconductor shortage.
Expected Mix Improvement: M&M anticipated that making the top-end versions of the XUV700 more affordable would lead to an increase in the sales mix of these higher-margin variants.
Increased Sales Volumes: The price cut was expected to drive overall sales volume growth, contributing to higher absolute profits.
The price reduction strategy proved successful for M&M. The sales volume of the XUV700 increased significantly, and the sales mix shifted back towards the top-end versions. The company maintained healthy profit margins despite the price cut.
On the EV front, M&M acknowledged that margins for its upcoming electric SUVs would initially be lower than ICE vehicles due to factors such as:
Higher Input Costs: Battery costs remain a significant factor in EV pricing, leading to a higher cost base compared to ICE vehicles.
Lower Sales Volumes: EVs are a relatively new category in India, and initial sales volumes are expected to be lower than established ICE models.
Marketing and Launch Expenses: M&M anticipates significant marketing and launch expenses associated with its new electric SUVs.
However, M&M expects EV margins to improve over time as sales volumes increase, battery costs decline, and production scales up.
5.2 Maruti Suzuki
Maruti Suzuki addressed the impact of discounts on its margins. The company acknowledged that higher sales promotion expenses had affected operating margin performance.
Increased Discounting: Maruti Suzuki increased discounts to stimulate demand in a muted market environment.
Impact on Margins: The company reported that higher sales promotion expenses had a negative impact of 80 basis points on its operating profit margin in Q2 FY25.
However, Maruti Suzuki expects discounting pressure to ease in the subsequent quarters due to its comfortable inventory position.
5.3 Tata Motors
Tata Motors discussed various factors impacting its pricing and margins, including:
Industry-Wide Discounting: Tata Motors noted the prevalence of high levels of discounting in the Indian passenger vehicle market due to intense competition and the need to clear inventory.
Impact of Commodity Prices: The company acknowledged that fluctuations in commodity prices, particularly for steel and rubber, had impacted its costs.
EV Pricing Strategy: Tata Motors highlighted its strategy of reducing EV prices to make them more accessible to customers. The company has benefited from declining battery prices and is passing on those benefits to consumers.
Tata Motors emphasized its efforts to mitigate the impact of pricing pressure through:
Cost Reduction Initiatives: The company is implementing various cost optimization measures to improve its profitability.
Mix Improvement: Tata Motors is focusing on selling higher-margin variants and models to enhance its overall profitability.
5.4 Key Takeaways:
Pricing Pressure: The Indian automobile industry is characterized by intense competition, leading to significant pricing pressure and the need for discounting to stimulate demand.
Margin Management: Companies are employing various strategies to manage their margins, including cost optimization, mix improvement, and strategic pricing adjustments.
EV Pricing Dynamics: The EV segment is witnessing rapid price evolution as battery costs decline and manufacturers strive to make EVs more affordable.
Impact of External Factors: Factors like commodity price volatility, supply chain disruptions, and changes in government policies can impact pricing and margins.
6. Insights for Investors in Indian Automobiles
6.1 Positive Factors:
Strong Domestic Demand: The Indian automobile market is witnessing robust domestic demand, particularly in the SUV and tractor segments. This is driven by factors like rising disposable incomes, a young population, and increasing urbanization.
Festive Season Boost: The festive season plays a significant role in driving sales in India. Both passenger and commercial vehicle segments experienced a surge in demand during the recent festive period, indicating strong consumer sentiment.
Growth of CNG and EVs: The shift towards cleaner fuel options is gaining momentum. CNG vehicles are becoming increasingly popular due to expanding infrastructure and environmental benefits. Similarly, the EV segment, while facing some headwinds, is expected to grow significantly in the long term.
Government Support: The Indian government is promoting the adoption of EVs through various policies and incentives, such as the recently introduced PM E-Drive scheme. These initiatives are expected to create a favorable environment for EV manufacturers and drive industry growth.
6.2 Challenges:
Supply Chain Disruptions: The global semiconductor shortage and other supply chain disruptions continue to pose challenges for the industry. Unexpected events like the flood at a key aluminum supplier for JLR can impact production and profitability.
Muted Demand in Certain Segments: While SUVs and tractors are performing well, demand for passenger cars, especially in the small car segment, remains subdued. This is attributed to factors like affordability challenges and the increasing preference for SUVs.
Intense Competition: The Indian automobile market is highly competitive, with both domestic and international players vying for market share. The entry of new players, particularly in the EV segment, is intensifying the competition.
Stress in International Markets: Global macroeconomic uncertainties and specific challenges in certain markets, like the slowdown in China and the industry degrowth in North America, can impact the performance of Indian companies with international operations.
6.3 Key Considerations for Investors:
Company-Specific Strategies: Investors should carefully evaluate the strategies of individual companies, including their product portfolio, focus on technology (CNG, EVs, hybrids), and approach to cost optimization.
Financial Performance and Outlook: Assess the financial health of companies, including their profitability, debt levels, and cash flow generation. Analyze their growth prospects and the potential impact of market challenges.
Government Policies and Regulations: Stay informed about government policies and regulations impacting the industry, particularly those related to emissions standards, safety norms, and incentives for EVs.
Long-Term Growth Potential: The Indian automobile industry has strong long-term growth potential, driven by factors like a large and growing population, rising incomes, and increasing demand for personal mobility. Investors with a long-term perspective should consider these factors while making investment decisions.
7. Sources
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