Leading analysts and market commentators from major brokerages have suggested that Maruti Suzuki's sharp stock decline could signal an upcoming stagnation in the company's financial performance.
29 Oct 2024 | 3258 Views | By Amit Vijay M
The shares of Maruti Suzuki, India’s leading passenger car manufacturer, experienced significant volatility, reaching an eight-month low with the stock falling to an intraday low of Rs 10,782.00 per share, representing a decline of 6.11% due to a notable 17.4% reduction in profits.
By the end of the trading ...
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The shares of Maruti Suzuki, India’s leading passenger car manufacturer, experienced significant volatility, reaching an eight-month low with the stock falling to an intraday low of Rs 10,782.00 per share, representing a decline of 6.11% due to a notable 17.4% reduction in profits.
By the end of the trading day, Maruti Suzuki's shares rebounded slightly, closing at Rs 11,005.00. Despite this recovery, the stock ended down by Rs 478.25, marking an overall decline of 4.16%.
Key analysts and market commentators from major brokerages suggested that this sharp drop in Maruti Suzuki's stock may indicate a forthcoming stagnation in the company's financial performance, although a recovery could be possible later.
Analysts attributed the decline to a generally lackluster festive season, increasing inventory levels at dealerships, and significant discounts, which have contributed to the overall bearish trends for the stock.
A senior analyst at a foreign brokerage firm remarked that Maruti's profit margins are under pressure due to various discount strategies implemented in the market, he stated,
"We believe this magnitude of decline may be higher than expected. Maruti's price reductions this quarter are aimed at attracting demand and may reflect the trade-off between maintaining market share and profitability," he indicated
Another analyst at Mirae Asset Capital Markets (India) Pvt. Ltd., indicated that the stock is likely to face continued pressure in the near to medium term due to a weak post-festive demand outlook.
He noted that the significant intraday drop observed was primarily due to disappointing margin performance, with MSIL reporting an EBITDA margin of 11.87%, falling short of market expectations.
Analysts have pointed out that Maruti's aggressive discounting strategies have negatively impacted its profitability, as the company continues to promote slower-moving models.
The Mirae analyst also emphasised that the general decline in profitability and the market's negative sentiment towards the stock could be exacerbated by increased tax liabilities arising from recent amendments in the Finance Act 2024, specifically the removal of indexation benefits and changes in tax rates on long-term capital gains from debt mutual funds.
Mirae has said the company had to account for a deferred tax liability provision of Rs 8,376 million, resulting in a one-time effect on profit after tax for this quarter.
Regarding the subdued sales growth during the festive season, the analyst remarked that since the peak in September, most auto OEM stocks have experienced declines of 15-20%, suggesting that the market anticipates a weak quarter ahead.
With the current trend favoring SUVs, the demand for sedans and hatchbacks – where Maruti is strong – appears to be waning. Mirae Asset Capital Markets (India) Pvt. Ltd. does not expect any meaningful revival in the small car market.
To revive demand, Maruti has been aggressively offering discounts, with rebates up to Rs 61,000 on various models, including the Wagon R, Alto K10, S-Presso, Eeco, Swift Dzire, Swift, Alto 800, and Celerio. Specifically, the Wagon R is available with a discount of Rs 61,000, the Alto K10 with close to Rs 57,000 off, the S-Presso with Rs 56,000 off, various dealers who told Autocar Professional
The company's torchbearer Swift is going at a discount of Rs 52,000, the Swift Dzire with Rs 17,000 off, and the Celerio with Rs 51,000 off.
Maruti Suzuki's stock has fallen to its lowest level since February 14, making it the third-biggest underperformer in the NSE Nifty Auto index.
The company, known for its SUV models like the Brezza and Grand Vitara, reported a standalone net profit decrease of 17.4% year-on-year, totaling Rs 3,069 crore, which is below the ₹3,710 crore forecasted by analysts in a Bloomberg survey.
The automaker also experienced nearly an 8% year-on-year decline in operating profit for the August-September period, attributed to a reduction in vehicle dispatches to dealerships.
At one time, the share of small cars (Mini and Compact) for MSIL was above 65%, but it has now reduced to around 50% as the company has tried to pivot to the fast growing SUV segment.
Currently, MSIL gets about one third of its volumes from SUVs(less than 4.4 meters), and it is expected to improve further as demand for SUVs remains stronger than for small cars.
Kranti Bhathini, Director of Equity Strategy at WealthMills Securities Pvt. Ltd., stated that the SUV market is dominated by brands like M&M and Hyundai, with demand being robust for the market leaders, including Maruti Suzuki.
However, he noted a softening in demand of late, leading to Maruti Suzuki shares ending on the weaker side of investors' expectations.
"Despite various discount strategies in the market, we believe the magnitude of this impact may be greater than expected. Maruti's price reductions this quarter do have strategic considerations." Bhathini noted
“In the long term, it is still necessary to observe whether Maruti can continue to increase sales and increase profits," the analyst at JP Morgan India added.
Future Outlook
Despite the somewhat tepid outlook for the immediate future, analysts believe the company is a good bet on the long term. Other analysts said that they expect MSIL to do well in the long term, led by its large distribution network of 3,925 sales outlets, 4,964 service touch-points spread over 2600 cities, and the largest low-emission product portfolio offering
Maruti Suzuki has already announced plans to launch numerous new models in the hybrid, SUV, and electric vehicle (EV) segments beginning with the Maruti Dzire 2024 in November.
The company aims to increase its production capacity to 4 million units per year by 2030-31, up from the current 2.25 million units.
Additionally, they expect significant growth in export volumes with the introduction of a new model in the utility vehicle (UV) segment and the expansion of the Nexa distribution network in rural areas, where there is a noticeable shift towards premium cars.
Overall, the long-term outlook for the company's shares remains unchanged, analysts indicated.