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Maruti Suzuki India Ltd. (REUTERS)
Maruti Suzuki India Ltd. (REUTERS)

Maruti’s operating loss must make investors rethink pricey valuations

  • For Maruti Suzuki India Ltd, the June-quarter results were a washout on all key parameters
  • Sales and production were hit, which led to a loss of 863.4 crore at the Ebitda level

Indian companies, including many in the manufacturing sector, have impressed this earnings season. They resorted to heavy cost-cutting and have offset the impact of covid to some extent.

Of course, this isn’t true of all of them. In the case of Maruti Suzuki India Ltd, the June-quarter results were a washout on all key parameters.

Production and sales were severely impacted by the nationwide lockdown, with volumes falling 81% year-on-year. This led to an unusual loss of 863.4 crore at the Ebitda level. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

One can argue that the loss was more or less in line with the Street’s estimates, but given some of the recent earnings surprises by some companies, such as in the cement sector, investors’ hopes had risen.

“Since 24 March, Maruti and other stocks have rallied very sharply, and these bad results will give an opportunity for investors to book profit and wait for better entry points," said Arjun Yash Mahajan, head of institutional business at Reliance Securities.

Sales skid
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Sales skid

Maruti shares have jumped about 54% from their lows in March, and are now down only about 12% compared to mid-February levels, i.e. before the markets started correcting to factor in the impact of the pandemic.

While the stock has been cruising in the past few months, the loss at the Ebitda level should hopefully make investors sit up and take notice.

It’s not like the road ahead will be a bed of roses. In a post-earnings conference call with analysts, the management said consumer demand reflected in the enquiries, bookings and retails is ~85-90% of the pre-covid situation and going forward will completely depend on how the covid-19 situation evolves. On the demand front, as the lockdown is gradually being lifted in some markets, demand is inching back to pre-covid levels. However, it is too early to say if this is pent-up demand, and if it will sustain, the company added on the call.

Importantly, since automobile demand is related to discretionary spending, it will be a while before volumes bounce back meaningfully.

It should be noted that in recent months, demand from tier-2 and tier-3 cities is being cited as a driver for consumption demand, not only for essentials but also for discretionary items like paints. However, with the number of coronavirus cases rising in rural areas as well, consumption demand from this part of the economy may fizzle out.

While the company’s management is still cautious of a revival, the stock’s valuations show a different picture. According to Bloomberg’s estimates, the Maruti Suzuki stock is trading at a rich one-year forward price-to-earnings multiple of 26 times, the highest among peers. While a valuation premium for the market leader is justified, investors appear to be underestimating the impact on earnings in the medium-term.

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