For Maruti Suzuki India, things would only worsen before they get better

Maruti Suzuki India Ltd stumbled over a plethora of challenges that disrupted its March quarter performance. And, things may only get worse before they can improve in the long run. Fiscal fourth quarter performance was hit by weak demand, relatively higher discounts, besides an adverse product mix with a lower share of diesel vehicles. In addition, there was the transition to BS-VI to grapple with, followed by the virus outbreak and lockdowns.

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That Q4 sales were lower by 16% year-on-year (y-o-y) was already known to analysts. A bigger disappointment was the 1.3% drop in average realization per vehicle. A key factor that dragged realizations down after many quarters is that the firm has stopped production of diesel vehicles, which enjoyed comparatively higher realizations than petrol vehicles. Further, BS-VI transition entailed higher promotional expenses that added to costs. On top of it, discount per vehicle too rose to ₹19,051from ₹15,125 a year ago. The upshot: earnings before interest, taxes, depreciation and amortization (Ebitda) margin at 8.5% fell by 200 basis points (bps) y-o-y and trailed Bloomberg estimates by 120 bps. “Maruti’s margin performance was at its lowest point since Q3FY13 and came as a significant negative surprise,” ICICI Direct Research said in a note. Ebitda fell by 31.7% y-o-y to ₹1,546.4 crore. Again, this was far lower than Bloomberg’s 18-analysts’ consensus of ₹1,779 crore. Importantly, the firm’s woes do not end here. Maruti, along with other auto original equipment makers, opened FY21 on a grim note with zero sales in April. “After complete lockdown in April, we expect some easing in restrictions during May and June. So, Q1FY21 would be a complete washout with ~73% YoY decline in volumes,” said Mitul Shah, vice-president, research at Reliance Securities Ltd.

This is not all. Industry experts are apprehensive of a quick production restart. Although covid-19 may push passenger car sales, given the fear among commuters to use public transport, affordability due to pay cuts and job losses is questionable. Also, it will take a few quarters to streamline the disrupted supply chain and dealer network, some of who are on the brink of bankruptcy.

For firms like Maruti, high growth in exports is unlikely given the falling demand in overseas markets too. So, it is not surprising that analysts are factoring flat FY21 earnings in a best case scenario. The stock shed gains made over the past two days after news that production has resumed in one of its plants. In spite of this, at ₹5,000, the stock trades at about 30 times the estimated earnings for FY21 capping near-term upsides. Its rich valuations, however, are aided by market leadership, strong parentage and cash flows that could weather any storm.