Why Maruti Suzuki is banking on demand for small cars to dictate profit margins

Maruti Suzuki India Ltd., the nation’s biggest carmaker, is likely to emerge from the coronavirus crisis stronger as the economic crunch will lead to buyers favoring cheaper hatchbacks and shifting to personal cars from shared transportation, analysts said.

Maruti posted a 28% decline in quarterly net income after a nationwide lockdown forced automakers to shut their factories and migrant workers to return to their villages. The company’s profit for the three months ended in March was 12.9 billion rupees ($171 million), compared with the 12.7 billion rupee mean estimate of 18 analysts in a Bloomberg survey.

The carmaker’s fortunes are set to turn around as changing buyer behavior favors Maruti’s dominance in cheap hatchbacks. “Maruti could emerge as the biggest beneficiary of demand recovery in the post-Covid era considering its stronghold in the entry-level segment," Motilal Oswal analyst Jinesh Gandhi wrote in a note.

While Maruti has reopened one of its three plants, it sees production volume remaining “very low" for as long as two months due to a labor shortage. The pandemic paralyzed India while automakers were already facing their worst-ever slump in sales. Maruti had zero local sales last month because of the lockdown.

“The near-term outlook remains weak amid Covid, but demand shift toward small cars and preference for personal mobility provide silver linings," Jefferies analyst Nitij Mangal wrote in a note.