Maruti valuations yet to catch up with sharp earnings downgrades1 min read . Updated: 05 Sep 2019, 10:42 PM IST
- Blended discount of ₹16,941 per vehicle in the June quarter was as much as 15% higher year-on-year
- Worse, its recent decision to lay off thousands of temporary (contract) workers implies that an improvement in the grim situation is not likely soon
Shares of Maruti Suzuki India Ltd have lost about 35% in market capitalization in the past year. The stock’s falling valuation underscores the lack of confidence among investors of a near-term recovery in passenger car sales. Even so, Bloomberg’s one-year forward price-to-earnings multiple of 23 looks rich, given the backdrop of a continued fall in automobile sales.
Importantly, the mood continues to be pessimistic even for the coming festive season. Car dealers are fearful of high inventory. Retail sales forecasts for cars are subdued. Why else would the country’s largest car manufacturer announce a two-day production cut in early September?
A Credit Suisse Securities (India) Pvt. Ltd report said: “Maruti’s production was lower by 33% year-on-year in August and it has increased discounts on various models for the month of September." The cash discount on utility vehicle Vitara Brezza has more than trebled from ₹15,000 to ₹50,000. Discounts are being given in other models in the premium segment, too.
Note that the blended discount of ₹16,941 per vehicle in the June quarter was as much as 15% higher year-on-year. Even the number of new models launched by Maruti Suzuki in the last few months failed to evince interest among buyers. Domestic sales in August fell below 100,000 vehicles, rewinding the clock back about nine years. The automaker had reached this milestone way back in October 2010.
Worse, its recent decision to lay off thousands of temporary (contract) workers implies that an improvement in the grim situation is not likely soon. These measures, along with benign raw material costs, may alleviate the pain from negative operating leverage.
Still, margin pressure is likely to continue, thanks to falling sales and the impact on operating leverage. “Our FY20 margin is 11.6%, down 120 bps (basis points) compared to 12.8% in FY10. This is the lowest since FY13," says Bharat Gianani, analyst at Sharekhan Ltd.
Consequently, Maruti Suzuki’s earnings estimate for FY20 is lower by 38% compared to what it was a year ago. Even then, the current valuation of 23 times estimated FY21 earnings is unlikely to lure investors, until sales recovery is on firm ground.