Maruti Suzuki extends fall on production cut report; down 7% in four days

Shares of Maruti Suzuki (India) were trading lower for the fourth straight day, down 2 per cent at Rs 6,567 in intra-day trade on the National Stock Exchange (NSE). It was 4 per cent away from its 52-week low price of Rs 6,317, touched in January 28, 2019.


The stock was down 7 per cent in the past four trading days, after the emergence of a report suggesting the company cut production due to lower demand. In comparison, the Nifty Auto index was down 4 per cent, while the benchmark Nifty 50 gained 1 per cent during the same period.


For the October-December (Q3FY19) quarter, Maruti Suzuki had reported 17.2 per cent year-on-year decline in net profit at Rs 1,489 crore due to weak market conditions. During the quarter, the company reported EBITDA margins of 9.8 per cent (decline of 594bps). This is on account of weak quarter due to the combination of many headwinds, like lower demand impacting volumes, higher commodity costs, higher discounts, adverse forex and negative operating leverage.


During the first 11 months (April-February) of FY19, the automobile major’s total sales grew by 5.3 per cent year-on-year, as compared to 13.3 per cent growth reported in during the same period of FY18.


Management anticipates demand visibility in the near term to become clear post Q1FY20. The timely arrival of monsoon and a favourable General Election results in India are also likely to influence the passenger vehicle (PV) industry growth during H2FY20. Analysts at Karvy Stock Broking believe PV industry will turnaround from Q1FY20 onwards on account of a favourable base and likely pre-buying.


Given the current soft volume growth outlook in the near-term, coupled with high discounting, we believe EBITDA margin recovery for Maruti Suzuki is likely to take at least 2-3 quarters. However over the period of time, the company plans to benefit from its increasing scale and royalty rationalization leading to sustaining its current margins, the brokerage firm said in management meet update.


While long-term growth outlook for Maruti Suzuki remains positive given the 4W under penetration in India and the company’s competitive advantages like strong brand and distribution network, we believe near term concerns on volume growth and margins persist, it said.