After a windfall fiscal 2011 (FY11), when it clocked heady sales and profit figures, Maruti Suzuki India Ltd is now on rough terrain. From April till date, there have already been a series of negative developments that have hit both sentiment and actual performance of the company.
The management on Monday stopped production after noticing irregular output (reduced number of units produced per day) and “deliberate quality” issues at its Manesar plant. This does not augur well for the country’s largest car maker in the near term, given that this facility handles its recent products—Swift, A-star and SX4—and accounts for about 30% of the total volume. Further, this follows a 13-day strike in June, which had hit that quarter’s production by around 13,000 units and revenue by about Rs 650 crore. Revenue for the quarter, therefore, grew a paltry 3.6% from the year-ago period. Besides, such problems raise questions on whether growth will be steady, particularly since Manesar is where capacity additions have been planned.
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The timing of this event is also significant given that its highly-promoted new variant of the Swift is being made at this unit. One hopes that such incidents do not hurt the management’s intent of steadily improving content localization, which in the long term would help Maruti reduce the impact of currency volatility (mainly on Japanese yen imports), which in turn hurts operating profit margins. In spite of the 13-day strike, the firm’s operating margin at about 9.5% was marginally lower than the year-ago level and better than analysts’ expectations. Fortunately, raw material prices have cooled off in the current year.
However, the economic slowdown, inflation, rising fuel costs and higher interest rates have dented the scorching pace of growth registered by auto firms in FY11. Maruti’s revenue rose 25% that fiscal, reporting capacity constraints. But after the June quarter, that scenario has changed. Analysts have revised estimates down to single-digit growth in earnings, even as vendors confirm a similar situation on volumes. Discounts could further hit profitability, too, if competition intensifies. The management had earlier expressed concerns that the conversion of footfalls into sales at its outlets has also been reduced.
No wonder, Maruti Suzuki’s stock has underperformed the BSE Auto index. Its shares trade at around Rs 1,066 apiece—close to its 52-week low—falling 8% since the announcement of June quarter results. The price-to-earnings multiple is around 10 times the estimated earnings for the current fiscal. Sentiment will improve if a concrete understanding is arrived at with the workforce at Manesar and if, post-September, the festive season ushers in better numbers.
Graphics by Ahmed Raza Khan/Mint
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