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Business News/ Markets / Mark To Market/  Maruti Suzuki’s outlook suggests rough ride in FY20 for car industry
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Maruti Suzuki’s outlook suggests rough ride in FY20 for car industry

Maruti Suzuki forecast 4-8% sales growth for the current financial year
  • Challenges of sluggish demand, inventory management ahead of the transition to BS-VI norms, cost escalations and the uncertainty around fuel prices raise concerns on the sales front
  • Higher sales and promotion expenses along with adverse forex movements weighed on profit margins during the quarter and throughout the year (Mint)Premium
    Higher sales and promotion expenses along with adverse forex movements weighed on profit margins during the quarter and throughout the year (Mint)

    Auto stocks faced a rough ride in the past year, with the BSE Auto index shedding nearly one-fourth of its value at a time when the broader markets rose marginally.

    If Maruti Suzuki India Ltd’s words carry weight, it looks like fiscal year 2020 (FY20) will be another year when the going will be tough.

    In the company’s conference call with analysts on Thursday, the management indicated a rough ride in FY20. Maruti Suzuki’s forecast of 4-8% sales growth for the current fiscal year is a damper.

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    Auto stocks faced a rough ride in the past year, with the BSE Auto index shedding nearly one-fourth of its value at a time when the broader markets rose marginally.

    If Maruti Suzuki India Ltd’s words carry weight, it looks like fiscal year 2020 (FY20) will be another year when the going will be tough.

    In the company’s conference call with analysts on Thursday, the management indicated a rough ride in FY20. Maruti Suzuki’s forecast of 4-8% sales growth for the current fiscal year is a damper.

    True, there was some good news in that the average discount of 15,125 per vehicle offered in the March quarter is much lower than the all-time high discount of 24,300 offered in the December quarter. Besides, inventory levels have normalized since April, with the company aligning production to the slowing demand in the market.

    Yet, Maruti Suzuki faces adversities, along with its peers. The most glaring concern is the impact of spiralling fuel prices, which can further affect buyer sentiment. Besides, auto companies face higher costs on account of safety regulation compliance and the new technology demands under BS-VI emission standards.

    Further, operating margins will be under pressure due to subdued volumes, higher commodity prices and adverse forex costs. On top of it all, the company has to contend with continued product discounts. In the March quarter, Maruti Suzuki’s Ebitda (earnings before interest, tax, depreciation and amortization) margin fell 370 basis points to 10.5%, far lower than Bloomberg’s consensus estimate of 11.5%.

    Besides, Maruti Suzuki also has some internal challenges. The company plans to phase out all diesel vehicles from 1 April 2020 which currently comprises nearly one-fourth of its product portfolio. The impact of this move on the firm’s sales faces uncertainty.

    Also, the new assembly line in its Gujarat plant brings with it higher depreciation charges. Fortunately, higher depreciation in the March quarter was partially offset by lower interest costs and relief on tax due to a write-back of earlier provisions and higher other income from investments. As a result, the net profit drop of 4.6% year-on-year was not as severe as the drop in Ebitda, and in-line with what analysts had estimated.

    While Maruti Suzuki may not be alone in battling several headwinds, the uncertainties around sales, profits and margins are likely to keep the stock range-bound. True, Maruti Suzuki’s shares are down 33% from a year ago, but its strong leadership position in the market is hard for any competitor to crack. Even so, at 6,903 apiece, the stock trades at 21 times estimated earnings for FY21, which looks a tad rich, given the uncertainties.

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    Published: 25 Apr 2019, 04:02 PM IST
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