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Maruti: Rocky road ahead


The year hasn’t been a happy one for India’s largest passenger vehicle maker Maruti Suzuki. The company’s stock has fallen 33 per cent from Rs 1,422 at the start of the year to Rs 958 at present.

Technically, this correction should be a buying opportunity, but analysts are expecting some more weakness in the stock price as competition, slowing sales and adverse currency movement hurt earnings in Q3 and Q4. In the second quarter, the company’s sales fell by 16 per cent annually, but net profit dropped by 60 per cent. Year-to-date, the company’s sales have declined by 18 per cent.



Production issues, coupled with slowing demand, have dented market share, down to 38 per cent from 45 per cent last year. The pressure is unlikely to abate in the next few quarters, believe analysts. Increasing competition has also come home to hurt Maruti, which has seen its Ebitda margins fall from 11-12 per cent to seven-eight per cent.

After the slight pick-up in sales during the festive period, demand is expected to remain sluggish in the third quarter. Also, given that the company is a net importer, the adverse movement in currencies will have an impact on earnings. For starters, with the rupee depreciating nearly 15 per cent in the last few months, the landed cost of imports will increase for the company. Also, the company has significant exposure to the Japanese yen, which has also been appreciating through the year, the negative impact earnings will spill into the third and fourth quarter.

According to JM Financial, although the company has recently got RBI approval to hedge its indirect exposure to JPY (10 per cent of sales), it only hedged its third quarter exposure and the fourth quarter remains un-hedged. JM Financial has reduced its FY12 earnings estimate by 12 per cent to Rs 54.4, against a consensus of Rs 64.7. While FY12 may have been a washout, analysts are bullish on the company’s long-term future.

It is changing its product mix, which may regain lost marketshare. Maruti is expected to launch a sub-Alto model called Cervio in early 2012. In the super-compact segment, the company is likely to launch a cheaper version of DZire, says HSBC Global Research. As a result of these changes, HSBC expects earnings per share to grow at a compounded annual growth rate of 27 per cent over FY12 and FY14.