Home >Market >Mark-to-market >Maruti loses speed as PV growth slows amid rising challenges

Maruti Suzuki India Ltd’s announcement of a price hike across its vehicles from 1 January did not go down well with investors. The stock reacted negatively on Thursday, although it recovered some the next day.

That a routine price hike done by auto firms in January to pass increases in costs onto consumers should worry is strange. The reason is that investors perceive the hike this time around would hit demand.

After all, the going has not been great for Maruti Suzuki and the overall passenger vehicle (PV) industry in recent months. From a robust double-digit growth for almost 18 months, the company’s sales shifted to the slow lane in July. Sales were flat in November compared to the year-ago period.

Moreover, dealer feedback that hefty discounts are being doled out to push sales is fuelling pessimism on the Street. Average discount in the September quarter was 18,750 per vehicle, 23% more than a year earlier. Talk is that discounts have been even higher this quarter.

R.C. Bhargava, chairman of Maruti Suzuki, said in a media interview on Friday that a slowdown is not alarming given the strong growth for four years.

Indeed, Maruti Suzuki is not alone in losing speed. The second-largest carmaker Hyundai Motor India Ltd also posted a drop in sales in November. Even in the festive season, industry inventory levels were unusually high.

What is the reason for the weakness in demand? Is it a temporary blip?

The current upside has lasted only four-five quarters for the industry unlike in the past when it has been longer. Sales, realization and margin analysis shows that the cycle has turned negative early.

Bharat Gianani, analyst at Sharekhan Ltd, said, “High interest costs and the liquidity crunch due to the NBFC (non-banking financial companies) crisis, high insurance costs and fuel prices impacted demand in the last few months." Companies are also cautious with fewer new launches.

In recent years, analysts feel that Maruti Suzuki reigned supreme thanks to several launches in the premium car segment, improving realizations and margins. Rising realizations along with soft commodity prices fuelled Ebitda (earnings before interest, tax, depreciation and amortization) margins to 16-17% in FY18.

Jefferies India Pvt. Ltd said in a report, “Maruti has been able to leverage other parameters too, namely valuation, pricing and product mix and margin improvement, and market share gains. This is quite different from FY04-11 period when industry growth and pricing mix drove returns." In fact, Maruti Suzuki’s stock surge at a compound annual growth rate of 25% between FY12 and FY19-till-date, masked the tepid growth in the rest of the PV industry.

The stock is down 30% since July when sales growth started moderating. Bloomberg’s average earnings estimate for FY19 and FY20 shows consistent downgrades since the March quarter, when earnings peaked. Valuations have dimmed in the last six months from 29 times to about 21 times FY20 estimated earnings. The sheen of outperformance has worn off with the current fall in demand.

Investor sentiment will improve only if cues on sales growth, softening commodity prices and favourable exchange rates point to better profitability going ahead.

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