Maruti Suzuki India Ltd’s November sales might have bounced back 65% from October after a long labour strike ended, but it hasn’t allayed fears of competition that could affect both volumes and earnings growth adversely in the near term.
November sales volume fell by 19% from the year-ago period to 91,772 units. One reason is the high base effect and the time taken to ramp up production after the strike. But the key factor is heightened competition in entry-level cars, where Maruti ruled the roost. November sales in the lower-end petrol segment, such as the Alto hatchback, fell 27% from a year ago.
A Credit Suisse AG report says, “Excluding Maruti, car sales in India grew by about 35%. Maruti’s market share declined from 54% in November 2010 to 43% in November 2011.” Due to disruption in production, long waiting periods for some models and proliferation of new models of small cars, firms such as Hyundai Motor Co., Toyota Motor Corp. and Tata Motors Ltd have gained ground.
Moreover, with inflation and interest rates showing no signs of moderation in the near term, Maruti’s small and compact car portfolio, which accounts for nearly three-fourths of its sales, is bound to be hit adversely. This segment is highly cost-sensitive and changes in both the cost of ownership (higher interest rates and inflation) and running cost (fuel price) will hit sales. Besides, in its small car segment, the company has fewer diesel variants, which are gaining market share due to soaring petrol prices in the country.
Dismal September quarter results and October sales numbers, although largely expected due to the labour strike, led to a steady slide in the company’s stock. Its shares have underperformed both the Sensex and the auto index of BSE for the past two quarters. With barely four months to the close of fiscal 2012 (FY12), it appears that the company would need to sell at least 125,000 units every month to reach the estimated consensus sales target, which is 8% lower than a year ago. This is an uphill task, given its plant shutdown scheduled in December. Would this then trigger another round of earnings downgrades?
Says Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd, “Investors could assess the situation after the December quarter, which is expected to be a washout both in terms of sales volume and profitability.” The latter is at higher risk compared with most other auto firms as yen-denominated imports and royalty payments to Suzuki Motor Corp. account for around one-fifth of Maruti’s revenue.
The declining rupee, therefore, makes imports more expensive in spite of raw material prices cooling off globally. In fact, the management in its recent analyst conference call had said the impact of a weaker rupee in the September quarter on vendor-related indirect imports would be felt in the current quarter, hitting profit margins.
That said, the March quarter performance would be crucial in determining the road ahead for Maruti. With a significant drop already factored into FY12 earnings, a steady uptick in volumes and improvement in its market share would bring back investor confidence.
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