According to a news report in the Business Standard, Nissan Motor Co. Ltd has drastically cut the number of small cars it plans to source from Maruti Suzuki Ltd. Nissan will now source just 10,000 cars annually, against the earlier target of 50,000 units, the report said.
This will come as a blow to the Indian passenger car manufacturer, which has a target of achieving exports of 200,000 vehicles by 2010-11.
Interestingly, the markets didn’t seem too perturbed by the news report. Maruti’s share price gained marginally on Thursday. That’s because the impact of the global slowdown on Maruti’s exports had already been factored in by the markets. Last month, when Hyundai Motor India Ltd said it would cut its production, it was clear that the global slowdown would hit sales of small cars, for which India has increasingly been becoming a hub.
Maruti’s management had, however, bravely held on to its export target. Analysts, however, had cut their target not only for domestic sales for the next couple of years but also their estimates of how much Maruti would export.
Citigroup Inc.’s auto analysts, for instance, had cut their estimate of exports by 12% for the current fiscal year and by as much as 26% for the next fiscal year in late October.
Their estimate of domestic volumes had also been cut by 3.8% and 10%, respectively, for fiscal 2009 and fiscal 2010.
The sharp 27% drop in volumes in November suggests that there is a risk that volumes may fall even below these revised estimates. Falling volumes is only the beginning of the company’s problems. This will lead to a contraction in margins and earnings will take a hit in the medium term. And although raw material costs are coming down, these will most likely have to be passed on because of competitive pressures.
It’s no wonder Maruti’s shares now trade at a valuation of only around nine times trailing earnings. Considering that earnings are expected to decline in the near future, there is room for a further devaluation.
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