Maruti Suzuki vs Tata Motors: Which auto major should you pick for long-term investment?

Maruti Suzuki and Tata Motors are two major auto manufacturers that have been in the industry for a long time. Both these firms are extremely popular and sectoral favorites among retail investors, mutual funds, etc. But which one is better than the other? Let's find out.

Stock price trend

While Maruti Suzuki has risen nearly 13 percent this year, Tata Motors has had a tough year, down over 20 percent YTD. In comparison, Nifty Auto has gained 14 percent this year.

However, in the past 3 years, Tata Motors has been the winner. The Tata stock has given multi-bagger returns, up 109 percent as against a 13 percent rise in Maruti.

In December, Tata Motors lost over 12 percent after an around 8 percent rise in November and October combined. The stock has gained in 7 of the last 12 months and lost in 5 months. It rose the most in July, up 9 percent while fell the most in September, down 14 percent.

Meanwhile, Maruti has shed around 7 percent in December extending losses from a 6 percent decline in November. However, in October, the stock advanced 8 percent. Maruti has also gained in 7 of the last 12 months and lost in 5 months. It rose the most in January, up nearly 16 percent while fell the maximum in March, down 9 percent.

About the firms

Tata Motors Limited is a global automobile manufacturing company. The company’s diverse portfolio includes a range of cars, sports utility vehicles, trucks, buses and defense vehicles. Its automotive segment consists of four reportable sub-segments: Tata Commercial Vehicles, which include commercial vehicles manufactured under the Tata and Daewoo brands; Tata Passenger Vehicles, which include passenger and utility vehicles manufactured under the Tata and Fiat brands; Jaguar Land Rover, which include vehicles manufactured under the Jaguar Land Rover brand; and Vehicle Financing, which includes financing of new vehicles and pre-owned vehicles.

Maruti Suzuki India Limited is engaged in the manufacturing, purchasing and sale of motor vehicles, components and spare parts. The company’s other activities comprise the facilitation of pre-owned car sales, fleet management and car financing. The company offers its products through three channels, namely Nexa, Arena and Commercial. Its portfolio of Nexa products includes Baleno, XL6, Ignis, S-Cross and Ciaz. Its portfolio of Arena products includes Vitara Brezza, Ertiga, Wagon-R, Dzire, Alto, Celerio, CelerioX, S-Presso, Eeco and Swift. Its portfolio of Commercial products includes Super Carry and Eeco Cargo.

Q2 Earnings

In Q2, Maruti Suzuki's quarterly profit more than quadrupled, as the country's biggest carmaker benefited from higher sales volume and improved price realisations. Higher commodity prices and chip shortage concerns had impacted earnings in the year-ago period. Its standalone profit increased to ₹2,061.5 crore for the quarter, up from ₹475.3 crore logged in the same period last year. Also, its standalone revenue from operations surged 46 percent YoY to ₹29,931 crore.

Maruti Suzuki sold a total of 5.17 lakh vehicles during the quarter ended September FY23, the highest ever in any quarter, increasing 36 percent YoY, which comprises domestic sales of 4.54 lakh units and exports at 63,195 units.

Meanwhile, Tata Motors' consolidated net loss narrowed to ₹944.61 crore in Q2FY23 as against a net loss of ₹4,441.57 crore in the corresponding period of the last financial year. Its consolidated revenue from operations rose 29.7 percent to ₹79,611.3 crore in the quarter under review versus ₹61,378.82 crore registered in the year-ago period.

The company, in its investor presentation, said that its revenue, profitability, and cash flows improved despite lower-than-planned volumes due to chip supply.

Which is a better auto stock?

Aniket Mhatre, Institutional Research, HDFC Securities, has picked Maruti as its pick between these two.

"Between the two, we like Maruti Suzuki from a long-term perspective as 1) it has a solid new model launch pipeline in place which would help it revive its lost share 2) the BS-VI phase 2 norms which are set to be introduced wef April 2023 are likely to further shift PV mix towards petrol variants, which is in turn very positive for Maruti. Further, any revival in rural demand next year would prove to be a catalyst for small car demand, which has seen weak demand for the last few years. Overall, given these triggers and post the recent correction, risk-reward appears favorable for Maruti," explained Mhatre.

Ashwin Patil, Senior Research Analyst at LKP Securities, is also in favour of Maruti. According to Patil, among Maruti and Tata Motors, Maruti is better placed as its order book is too high and has the visibility to cater to it over the next 1-2 years.

"Demand for its new models is good. Focus on the SUV segment is high, which would help it to gain a good market share. Rural markets are shaping up well. Softening of input costs, currency benefits, and lower discounts should help its profitability. On the other hand, TaMo is troubled by several factors globally. Its balance sheet is under pressure, margins are impacted. So we think this shall continue over some more time. Although Maruti looks pricey here, still it should grow well," he explained.

Vinit Bolinjkar - Head of Research at Ventura Securities also prefers Maruti between these two as it has more stability in its financials when compared to Tata Motors. Here are the key reasons behind his choice:

- Maruti focuses on only one segment – passenger vehicles (PV), while Tata Motors is on PV, commercial vehicles (M&HCV and LCV) and premium cars (JLR).

- Maruti's focus on domestic and export markets, while Tata Motors has manufacturing, R&D and design facilities in 25 locations across India, Europe, China, the UK and North America.

- Debt-free balance sheet and net cash investments of Maruti stand at ₹46,000 cr, while Tata Motors has a net debt of ₹85,000 cr against a total net worth of ₹25,400 cr (net debt to equity of 3.3X).

- Uncertainty in its JLR business (contributing 85 percent to the consolidated revenue) is dragging the overall performance of Tata Motors. JLR’s retail sales declined at a YoY rate of 23.2 percent to 166,946 units in H1FY23. The recession in Europe and US could further impact the sales performance of the company. Though the JLR is targeting GBP 30 bn revenue and >10 percent EBIT margin by FY26, the company reported a revenue of GBP 19.1 bn and negative EBIT of GBP 122 mn during the past 4 quarters (trailing 12 months).

Unlike Tata Motors, the business of Maruti Suzuki is more predictable and comparatively immune to the global recessionary environment, said Bolinjkar.

Aditya Welekar, Senior Research Analyst, Axis Securities has also picked Maruti.

"We recommend accumulating Maruti at the current levels from a long-term perspective. Maruti has a large order book of 4.12 Lacs as of Q2FY23 (3.5 Lac in Q1FY23), out of which 1.3 Lac are for SUVs (Brezza/Vitara). The management’s focus is now to achieve a dominant position in the growing SUV segment. Maruti has a sales target of 2 Mn units for FY23 (a strong 21 percent growth YoY). This may fall slightly short as the company expects the shortage of electronic components may impact Dec '22 production more than it witnessed in recent months," said Welekar.

He further noted that Maruti has been undertaking all possible measures to minimise the impact and has an ambitious target to grow at a strong double-digit rate for the third consecutive year in FY24.

Auto sector outlook

Going ahead, market experts feel that 2023 is likely to be a challenging year for the auto space.

"In the coming year, the auto sector is unlikely to perform well. This is due to the fact that the pent-up demand for automobiles is now coming to an end. Several new models are being aggressively pushed by automakers, particularly in the SUV segment. The growth in automobiles, which was largely driven by SUVs, now appears to be overcrowded, which will further dampen the sector's growth and lead to a drop in demand. Furthermore, demand in the export market has been muted, which will eventually have an impact on the industry's overall topline and bottom-line growth," said Sunil Damania of MarketsMojo.