(Naveen Kumar Saini/Mint)
(Naveen Kumar Saini/Mint)

Maruti braves rough weather in Q1, but strong headwinds remain

  • A steep sales drop and a weak operating leverage weighed on Ebitda margin that fell 450 bps to 10.4%
  • Stock trades way below the five-year peak P-E multiple of 30 times one-year forward earnings

Maruti Suzuki India Ltd’s shares have been battered, as strong headwinds have derailed passenger vehicle (PV) sales over the last several months. Since January, its shares have fallen 23% on the back of steady cuts in earnings forecasts.

Against this backdrop, it was expected that the June quarter performance would be worse than the year-ago period. After all, one could not expect miracles after the carmaker reported an 18% drop in sales volumes.

With sales falling in all segments, with the exception of light commercial vehicles, operating leverage took a beating.

Hence, Ebitda (earnings before interest, taxes, depreciation and amortization) margin fell by a whopping 450 basis points year-on-year to 10.4%. But this was in line with Street estimates. Weak capacity utilization on account of poor sales, higher depreciation and promotional expenses, and adverse currency movement dented profitability.

That said, the company’s measures to control costs and even lower discounts, in spite of steadily falling sales, is commendable. Hence, in spite of a rise in inventory, realizations improved both year-on-year and quarter-on-quarter. In the analysts’ call on Friday, the management echoed concerns of a slowdown. Inventory at the end of the quarter stood at five weeks, which conveys weak demand. A report from the Federation of Automobile Dealers Association said that PV inventory in May was five-six weeks, with new car registrations falling by 5% year-on-year, and 11% sequentially.

Meanwhile, the steep 27% year-on-year fall in Maruti Suzuki’s quarterly net profit did not seem to irk investors. Its shares rose by around 3%. Results were in sync with the Street’s forecast. Moreover, there is hope that the GST (goods and services tax) Council meet to consider measures to improve auto demand would result in tax cuts. This elevated investor sentiment across auto stocks.

Be that as it may, the last few quarters have proved that market leader Maruti Suzuki is resilient and able to sustain double-digit Ebitda margin amid challenges. “We expect a gradual increase in first-time buyers from rural markets and the success of new BS-VI launches. The firm’s strong product pipeline, leadership and strong management capability would aid recovery when market improves, and aid profitability going forward," said Mitul Shah, vice president (research) at Reliance Securities Ltd.

Yet, valuations and earnings forecasts are unlikely to improve, until the sentiment perks up in the auto sector. The one-year forward price-earnings multiple of 22 times is close to the five-year average of 23 times, even though it’s way below the peak of 30 times on 19 December 2017.

For now, the outlook for the next 12-18 months is hazy. Uncertainties over BS-VI emission norms and their cost implications for auto firms, monsoon blues given the deficit rainfall, and shared mobility will continue to weigh on PV sales.