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Maruti shares recover; but why are brokerages not impressed?

Credit Suisse noted that the firm has increased discounts on all models except Ertiga.

Updated: Aug 22, 2019, 10.01 PM IST
NEW DELHI: Shares of Maruti Suzuki might have recouped 7 per cent in the past one week, but analysts do not see an end to the dismal performance in the short term.

Car sales have slumped, the competition has risen and the market leader is being forced to offer discounts. Maruti-specific problems too are at play.

Credit Suisse noted that the automaker has increased discounts on all models except Ertiga. Company-specific concerns are cropping up, it said, adding that depreciation in the rupee against the yen could add to the pressure.

Industry watchers noted that drop in utility vehicle sales in July was somehow arrested by good demand for the newly launched Hyundai Venue, which sold 9,585 units for the month. Mahindra & Mahindra’s XUV300 also sold 4,464 units. The numbers hurt Maruti’s Vitara Brezza sales, which fell 62.6 per cent to 5,302 units.

“Maruti’s personal vehicle market share declined by 350 bps to 48.9 per cent for July. On a year-to-date basis, the carmaker’s market share is down 200 bps to 50.5 per cent,” said Nirmal Bang Institutional Equities.

As per reports, Maruti is offering as much as Rs 70,000 discount on Ciaz sedan. On S-cross, Ignis and Baleno there are maximum discounts of Rs 60,000, Rs 55,000 and Rs 45,000, respectively. On Maruti Suzuki Dzire petrol model, Rs 20,000 of cash discount is available along with Rs 20,000 exchange bonus. Its diesel variant is reportedly offered at a cash discount of Rs 25,000 of cash discount and an equal amount on exchanging one's old vehicle.

Average discounts for the June quarter stood at Rs 16,941 per unit, up 12 per cent on a yearly basis.

As a stock, Maruti Suzuki still trades higher on core PE basis, Credit Suisse said while recommending a target of Rs 5,700. This target was 8 per cent lower than Wednesday’s closing price of Rs 6,222.95.

In a July-end note, Phillip Capital cut the scrip’s target to Rs 4,927 from Rs 6,012 as it saw risks to volume growth and margin estimates.

The brokerage, which attended the company’s conference call said the management was unwilling to give volume guidance for the full year. Earlier, it had guidance of beating SIAM’s guidance of 3‐5 per cent growth for FY20. This is after the company reported a 17.9 per cent drop in volumes to 4,02,594 units in the June quarter.

“Higher consumer offers increased incentives to dealers for wholesale billing, adverse operating leverage due to ramp up at SMG (Gujarat plant) and a subdued demand environment will negatively impact profitability going forward and does not leave much room to fully pass on costs related to the BS6 transition,” Phillip Capital said.

Other brokerages though feel that near-term weakness may persist , but their targets on the stock suggest upside potential.

Over the next few months, Maruti’s new model launches and benign raw material trends/cost controls will come into play and offer some respite, said JP Morgan in an August note.

“Our March 2020 target of Rs 7,000 is based on 24 times FY21E P/E, which is in line with last five-year average,” the brokerage said.

Global brokerage firm CLSA slashed the target price of Maruti Suzuki citing weak demand. While maintaining a ‘Buy’ call on Maruti Suzuki, CLSA cut the target price to Rs 7,200 (from Rs 7,400 earlier). It also cut FY20-21 EPS by 8-10 per cent on lower volumes.
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