Maruti Suzuki slows down on volume and margin worries; stock falls

Brokerages have cut net profit estimates by up to 12 % over next few years

The Maruti Suzuki stock is down 17 per cent since its high a month ago on concerns that higher commodity prices, competitive environment, and the adverse currency situation will affect revenues and margins. Brokerages have downgraded the stock, and cut their earnings estimates by up to 12 per cent over the next two years.

Analysts have highlighted a couple of areas, which would keep the stock under pressure. Macro headwinds and the impact on volume are the most prominent among them.   

Given the fact that car buyers will have to buy the three-year third party insurance upfront, prices are up 1 per cent from September. Kotak Institutional Equities' Hitesh Goel and Nishit Jalan are of the opinion that industry growth in the second half of the financial year will moderate owing to higher oil prices and interest costs, which will make it difficult for car companies to hike prices. Amyn Pirani of Deutsche Bank hopes discounts will increase with the share of zero-discount models expected to move up from 50 per cent in Q1FY19 to 39 per cent by the end of the financial year.

The other cause of worry is higher material costs. Indian steel prices are up over 16 per cent in the past one year and aluminium prices, too, are expected to increase. 

 

This will make it difficult for Maruti to hike prices amid competitive pressures and macro headwinds without impacting volumes. Given the rupee depreciation against the Japanese yen by about 12 per cent year to date, imports will become more expensive for the company. A 6 per cent depreciation of the rupee against the yen is expected to affect margins by about 100 basis points. The company may not fully pass on all the costs to consumers, which will influence its margins to the tune of 50-80 basis points in FY19.

While the company is expected to maintain its volume market share in the passenger vehicle market, multiple headwinds could cap upsides for the stock. At the current price, it is trading at 26 times its FY19 earnings estimates. With volumes in August down 3.4 per cent over the year-ago period owing to a high base and floods in Kerala, investors should await clarity on the volume trajectory before taking exposure to the stock.