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Business News/ Markets / Mark To Market/  Maruti’s rich valuations at risk as margins fall short of expectations
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Maruti’s rich valuations at risk as margins fall short of expectations

Maruti’s Ebitda margin of 10.2% missed Bloomberg’s estimate of 11.2% by a wide margin
  • Sales growth for PV industry and Maruti Suzuki is likely to be negative in FY20 and 3-5% growth in FY21
  • A rich forward P-E of 27 times prices in positives such as improving sales and deft BS-VI transition (Reuters)Premium
    A rich forward P-E of 27 times prices in positives such as improving sales and deft BS-VI transition (Reuters)

    When Maruti Suzuki India Ltd reported 2% year-on-year (y-o-y) volume growth in the December quarter, it raised investors’ hopes. The recovery in its shares picked up pace, with the stock gaining 30% from its 52-week low in July 2019. What’s more, in the process, its price-to-earnings (P-E) multiple rose to about 27 times FY21 earnings estimates.

    But investors were in for an unpleasant surprise, as the company’s Q3 performance puts this heady valuation at risk.

    To begin with, Q3’s net revenue growth was a mere 5% y-o-y; analysts were expecting double-digit growth. Average realization grew only 3% y-o-y, due to an unfavourable product mix. Besides, discounts were at a record high of 33,000 on an average per vehicle. The management in its analysts’ call stated that high discounts were given to deplete BS-IV inventory, which is finally down to less than two weeks.

    Graphic by Naveen Kumar Saini/Mint
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    Graphic by Naveen Kumar Saini/Mint

    But then, this also signals weak demand. Some dealers said sales were yet to gain traction in spite of Maruti Suzuki launching several BS-VI complaint vehicles. Further, there is concern on how the consumer would react to the price hike of about 4.7% announced on Monday due to an increase in input costs.

    To be sure, high costs had already dragged Q3 operating performance. While the 2,102 crore Ebitda (earnings before interest, tax, depreciation and amortization) rose 9% y-o-y, it missed Bloomberg’s 20-broker consensus of 2,339 crore.

    Worse, the Ebitda margin of 10.2%, although a tad higher y-o-y, was significantly below Bloomberg’s estimate of 11.2%. “It came as a substantial negative surprise given benign input costs of key materials like steel during the quarter," said a note by ICICI Securities Ltd.

    The quarter’s miss on most parameters raises concerns over Maruti Suzuki’s ability to expand margins in near-to-medium term. After all, the company has to manoeuvre difficult turns such as higher marketing costs given more BS-VI launches, apart from the general weakness in demand.

    In any case, sales growth for the passenger vehicle (PV) industry and Maruti Suzuki (market leader with about 50% share) is likely to be negative in FY20 and 3-5% growth in FY21.

    “In all this uncertainty, Maruti stands out for its strong product pipe line, success of new launches and leadership," said Mitul Shah, vice president (research) at Reliance Securities Ltd. The recent price hike and lower discounts (indicated by the management) may lift its Ebitda margins in the coming quarters.

    However, these positives are already priced into the auto manufacturer’s rich valuation. Unless the demand pull for PVs— following the BS-VI transition—is on a firm track and realizations improve, there may be little headroom for further price appreciation in the Maruti Suzuki stock.

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    Published: 28 Jan 2020, 04:07 PM IST
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