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Business News/ Companies / Favourable monsoon forecast sends Maruti back to the drawing board
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Favourable monsoon forecast sends Maruti back to the drawing board

Maruti Suzuki board has returned sales forecast by the management, asking it to come up with an upgrade

Maruti Suzuki aims to sell two million units a year by 2020, and the recent sales push from the board comes in that backdrop. Photo: Ramesh Pathania/MintPremium
Maruti Suzuki aims to sell two million units a year by 2020, and the recent sales push from the board comes in that backdrop. Photo: Ramesh Pathania/Mint

New Delhi: The rain clouds are not yet on the horizon, but the mood at Maruti Suzuki India is upbeat.

The board of India’s largest car maker has returned sales forecast presented by the management, asking it to come up with an upgrade, on optimism of an economic turnaround leading to higher demand for automobiles.

“The marketing and sales team submitted its forecast, which was rejected by the company’s board as it was on the lower side," a person with direct knowledge of the matter said on condition of anonymity.

“The board asked the management to come up with a realistic forecast," this person said, adding the board thinks Maruti should aim for “lower double digit" growth as against “single digit" growth forecast by the company management earlier.

Hopes of faster economic growth have been fanned by predictions of bountiful monsoon rains. The India Meteorological Department (IMD) and private forecaster Skymet Weather Services Pvt. Ltd have predicted above-normal rains in the June-September southwest monsoon, after two consecutive years of drought.

The IMD said on Tuesday that monsoon rainfall will be 106% of the long-period average and that a 94% probability existed that it will be “normal to excess." The release of data showing a pickup in industrial growth and a dip in retail inflation below 5% reinforced optimism.

The monsoon forecasts signal a potential alleviation of rural distress and a revival of demand in the countryside that had been crimped by drought and a slide in the prices of farm commodities.

Maruti Suzuki directors are expected to approve the new outlook for sales at a board meeting on 26 April when the company will also declare its annual results for 2015-16.

Maruti Suzuki chairman R.C. Bhargava confirmed the company will come up with sales guidance for the current fiscal year after the board meeting.

On Wednesday, Maruti shares rose 4.42% to close at 3,734.60 on BSE as the benchmark Sensex closed 1.91% higher at 25,626.75 points.

Two sector experts, one a broker and another a consultant, said a high base effect, the result of robust sales in the fiscal year that ended 31 March, may constrain growth this year. Both said they may revise their sales forecasts for Maruti a few months from now.

“We are looking at 7% growth for Maruti," said Mahantesh Sabarad, deputy head of research at Mumbai-based brokerage SBI Cap Securities Ltd.

He said the forecast was a “a composite call" based on several factors such as overall macro-economic conditions, the monsoon forecast and the effect.

“Monsoon forecast does not move the needle for the forecast to go up. Come June, July, we analysts are habituated to revise our estimates. We’ll take a fresh call then," Sabarad added.

Forecasting and consulting firm IHS Automotive expects flat sales for Maruti.

“The logic is that they do not have any other important model launches coming this year. There is a high probability that the company’s volumes will be impacted because of the base that it has created," said Anil Sharma, principal analyst at IHS Automotive.

The person quoted in the first instance said new models, such as the premium hatchback Baleno and the compact sports utility vehicle Vitara Brezza will drive sales growth.

“I believe we should be in double digit (growth in 2016-17)," the person said. “We have some excellent models. Just look at the reception these models have in the year."

Maruti Suzuki aims to sell two million units a year by 2020, and the recent sales push from the board comes in that backdrop.

To be sure, Maruti is expected to face capacity constraints as both its factories in Gurgaon and Manesar are running at optimum capacity.

Parent Suzuki Motor Co.’s facility in Gujarat, which has a contract manufacturing agreement with Maruti, will only get functional by early 2017.

“The pressure should be on the production people to produce more and marketing people should not complain. If you don’t put up the demand then how will they create capacity for future," said the person cited above, adding that above-normal monsoon rainfall will lead to revival of rural demand, which drives sales of Maruti Suzuki’s entry-level cars such as the Alto, Wagon R and Omni.

Indeed, if Maruti revises its forecast upwards, it is likely to have a positive impact on India’s passenger vehicle industry. The automobile industry lobby group has lowered its forecast for the current financial year to a 6-8% range from an earlier 11%.

Typically, Maruti grows at a faster pace than the overall auto industry. Sales of Maruti Suzuki grew 11.5% to 1.3 million units during 2015-16, while the Indian passenger vehicle industry grew 7.24% to 2.78 million units.

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Published: 13 Apr 2016, 09:22 AM IST
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