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Low volumes could spoil Maruti show

Ram Prasad Sahu / Mumbai 19 Jun 12 | 12:18 AM

The Reserve Bank of India (RBI)’s decision on Monday to maintain status quo on interest rates, against expectations of a cut in its key lending rate and cash reserve ratio for banks, has dampened the hopes for a demand revival for the automobile sector.

“It (rates remaining unchanged) is a disappointment for the auto industry. For the car industry, it’s very important that the interest rates come down, as 70 per cent of sales are financed," Mayank Pareek, managing executive officer (sales and marketing) at Maruti Suzuki India Ltd, told Press Trust of India, adding sluggish demand would continue as sentiments were still low.

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A fall in sales volumes, higher fuel prices and news about the possibility of a special tax on diesel vehicles have already seen the Maruti Suzuki scrip shed 6.3 per cent over the last month, underperforming its peer index (down 0.8 per cent) and the broader market (up 3.4 per cent). The Street is worried that the recent slowdown in sales could mean a muted volume outlook for FY13. On a low base (FY12 volumes were down 11 per cent year-on-year), the company is expected to post 10 per cent growth in FY13.
 

LOW BASE EFFECT
In Rs crore FY12 FY13E
Total revenues 35,610 42,990
% change y-o-y -1.4 20.7
Ebitda 2,818 3,646
% change y-o-y -29.1 29.4
Ebitda (%) 7.9 8.5
Bps change y-o-y -310 60
Net profit 1,632 2,047
% change y-o-y -28.7 25.5
P/E (x) 18.8 15.4
Consolidated financials                                        E: Estimates
Source: Goldman Sachs report

The Maruti management is also cautious about demand, given the slowdown, fall in inquiries and lower conversions, especially in urban areas. To add to its woes, the depreciating rupee is also likely to hurt margins. According to Ajay Seth, chief financial officer, at the current levels of the rupee, there could be an impact of up to 150 basis points for FY13, which the company is aiming to address through various initiatives. Given that macro headwinds are likely to stay for some time, analysts are bearish on the stock (now at Rs 1,091.50) in the near term.

Volume hurt by weak demand
The first two months of the financial year have not been good for India’s largest passenger car maker. After a two per cent year-on-year fall in April, volumes fell five per cent in May due to a steep fall in sales of petrol-driven vehicles. Petrol price hikes have led to a swing towards diesel vehicles translating into a steep rise in demand for diesel variants of Swift, while petrol-powered volume generators (800, Alto, A-Star and WagonR) are being shunned.

While its sales in April-May have seen a fall, the management says it has outperformed the sector. Though petrol vehicle sales fell 20 per cent for the sector, Maruti’s sales fell 18 per cent in April. Similarly, its diesel portfolio saw growth of 80 per cent, compared with 59 per cent for the sector. The strong diesel vehicle sales have been aided by additional capacities, which have also brought down the waiting period of diesel vehicles, which vary from a month for the Swift to four months for the Dzire.

While the trend in diesel vehicle sales is encouraging, analysts are a bit cautious about the industry’s prospects. In a June 14 report, Jamshed Dadabhoy and Arvind Sharma of Citigroup, said: “Management’s guidance for overall FY13 industry growth was a slightly optimistic (in our view) 10 per cent year-on-year. Our FY13 industry forecast is 5 per cent. There are downside risks to these estimates, especially if excise duty on diesel cars is hiked."

Margin outlook
Apart from muted volumes, there is pressure on the margin front as well. The biggest overhang on the margin front is the depreciation of the rupee against major currencies, especially the Japanese yen. The rupee is down 15 per cent since April against the yen, and at the current level, is likely to hurt Ebitda (earnings before interest, taxes, depreciation and amortisation ) margins by up to 150 basis points. Competition is also rising leading to high discounts in the petrol segment.

While these are negatives, part of the pressures are mitigated by lower commodity costs, benefits from the merger (cost/vendor rationalisation) with Suzuki Powertrain India and a rising proportion of diesel vehicles (wherein no discounts are offered to consumers), with increased capacities coming on stream. Maruti Suzuki has a yearly diesel engine capacity of 300,000 units currently, and with up to 100,000 units sourced from Fiat, it will touch 400,000 units in FY13.

The management is also focusing on localisation to reduce import content and has set a target of 10 per cent Ebitda margins. Unfavourable exchange rates, lower volumes, higher raw material and employee costs led to a fall in Ebitda margin in FY12. Analysts, however, estimate margins to inch up to 8.5-9 per cent levels in FY13.

The road ahead
Demand holds key for Maruti Suzuki after a dismal sales volume of 1.13 million units in FY12, due to a strike at its Manesar plant and lower sales. While robust diesel sales are encouraging, given that its product mix is still skewed towards petrol-driven vehicles (about 65 per cent) and the company is offering discounts to clear inventory of petrol-powered cars. With the economic outlook subdued, expect volume growth to remain muted. In this backdrop, the stock is likely to lag broader markets in the short term. However, if interest rates fall and there is rise in demand in the second half of the year due to the festival season, margins could see an improvement.

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