The A-Star, Maruti Suzuki India Ltd’s latest launch, has failed to lift the spirit of investors. The company’s shares hit a three-year low on Thursday, a day after the launch of its new hatchback. While the new model is a welcome introduction to Maruti’s product portfolio, investors are concerned about the twin blows of falling domestic demand as well as a decline in the global auto market since this would hit the company’s exports.
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Following Hyundai Motor India Ltd’s announcement that it would cut production by about 10% because of the global slump, Maruti, too, has now admitted that production at its Gurgaon plant near Delhi has been cut. While Maruti has reaffirmed its fiscal year 2010-11 target of exporting 200,000 vehicles, that now seems like an ambitious target. For one, its contract manufacturing deal with Nissan Motor Co. for 50,000 vehicles has still not been finalized. Besides, with most global auto makers feeling the heat of the slowdown, it’s unlikely that Maruti Suzuki’s exports division would go unscathed.
As far as the domestic market is concerned, the launch of the A-Star should help the company regain some lost market share in the A2 segment.
While Maruti hadn’t had new launches in this segment for some time, Hyundai’s launch of the i10 in October 2007 helped it gain share in this segment. Maruti’s new product has relatively higher fuel efficiency, and analysts expect it to regain some of the lost market share in the segment. The company’s performance in the segment will be further helped by the launch of the Splash, expected in the June quarter of 2009.
Still, the company would at best get a slightly higher share in a shrinking pie, and this is the worry reflected in the company’s shares. Also, the company may not reap the full benefits of the drop in the prices of commodities, since competitors are likely to pass on some of this to customers given the falling demand scenario.
But auto analysts expect that the fallout of this will be mostly visible this fiscal. Citigroup Investment Research, for instance, expects the company’s earnings to fall by 12.9% this fiscal, but estimates that earnings would grow by 26.2% and 18.7%, respectively, in the next two years. BNP Paribas SA estimates growth at 17.7% and 14.6%, respectively, in the next two years. Both research firms are betting that exports would drive growth during the period.
The markets, however, aren’t buying this hypothesis yet. At current levels, the stock trades at about nine times trailing earnings, far lower than the expected growth in earnings.
Graphics by Paras Jain / Mint
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