Maruti: Downgrades in offing

Volume and earnings per share estimates for FY13 likely to be cut

Maruti Suzuki India is fast-becoming a high-beta stock, as it’s increasingly difficult to forecast the downside risks. As a result, it’s not a conviction buy even though the stock has fallen 8.5 per cent since trouble broke out at its Manesar plant. Even if one were to discount the incident, the June quarter numbers have thrown up negative surprises for the market. Though the company clocked the highest gross margins per car in the quarter, the currency impact has hurt profitability. This has come as a surprise, as the company had conveyed that its exposure was hedged for Q1FY13.

Deepak Jain, auto analyst at Sharekhan, says royalty as a percentage of sales has 6.2 per cent in the first quarter, a sequential increase of 110 basis points. This is a negative surprise, he explains, as the company had indicated it had completely hedged its currency exposure in Q1. According to Jeffries Equity Research Asia: “Higher power costs, as well as some losses on commodity hedging, further hurt margins. Other expenses per car (including staff costs) increased to Rs 54,000 (up 46 per cent year-on-year (y-o-y ) and 27 per cent sequentially), the highest ever. Overall, Ebitda (earnings before interest, taxes, depreciation and amortisation) was down three per cent y-o-y.” These factors have impacted operating margins to come in at 7.3 per cent, below the Street’s estimates.

Apart from currency woes, analysts are not sure how long the lock-out at the Manesar plant will continue. The plant produced 1,500 cars per day and analysts are building in anything from one to two months of production loss. While Sharekhan’s Jain is estimating a production loss of 50,000 units, Edelweiss is factoring in one month’s loss. Clearly, if production is stalled for a month, the company is unlikely to clock a volume growth of 11 per cent. This would negatively impact earnings. Edelweiss has lowered its FY13 and FY14 earnings per share estimates by 24 per cent and nine per cent, respectively.

Another issue that will impact earnings is wage negotiations. If the union manages to renegotiate higher wages, then it would further eat into operating margins. For FY12, staff costs stood at 2.4 per cent of sales. Typically, this varies at 2.2-2.5 per cent. If the company does increase wages, then this could go up to three per cent. Analysts say given the long-term potential and profitability outlook, the stock seems attractive. However, there are plenty of issues still open.