CLSA downgrades Maruti on changing auto sector

Says a recovery in demand for passenger vehicles might not be as large as expected

With constraints in supplies of diesel engines, rating agency CLSA has downgraded car market leader Maruti Suzuki India even as petrol car demand refuses to improve from the current stage in the domestic market.

With all hopes of a demand improvement on lying on the Hindu festive season which has already started and will continue over the 2-3 weeks, car manufacturers are staring at one of their worst performances in recent years.

CLSA has downgraded the Maruti stock to SELL from Underperform.

Sales of Delhi-based Maruti Suzuki rose just 0.03% to 473,218 units during the period April-September this year as against the same period last year. The company has a market share of 37% in the domestic passenger vehicle (PV) segment.

"We believe that any demand recovery in the PV market might not be as large as being hoped for since the compounded annual growth rate (CAGR) from FY08-13 is still 13% even after the slowdown over FY12-13", said a report from CLSA released today.

The company's stock was trading 0.27% lower at Rs 1,366.05 on the Bombay Stock Exchange as against the closing of Rs 1,369.80 of yesterday.

"Maruti specifically needs petrol car demand to improve given its diesel engine capacity constraints, which might not happen. Meanwhile, industry demand profile is changing and is moving towards segments where Maruti is less dominant", the report further added.

Maruti's volume generating products such as the new Alto 800, Wagon R, Alto K10, Zen Estilo, Eeco, M800, Omni, Gypsy and A-Star, which make up 56% of its line-up, are sold without a diesel option.

"Competition will also rise over FY14-15 once Hyundai and Honda launch their diesel cars. Stock has rallied on hopes of a large demand revival, which is by no means a certainty. We cut FY14 EPS by 7% and downgrade Maruti from U-PF to SELL with a TP of Rs 1270", added the report.