Maruti stock gains lost ground from improving expectation of volume growth

Scores over peers on BSVI portfolio, inventory levels and discounts

After falling 30 per cent over the last year, Maruti Suzuki has recovered most of its losses and is now trading at just 6 per cent lower than the year-ago levels. The recovery in the stock, which started in August has gathered pace despite the worsening demand and volume conditions over the last few months and the challenges related to the transition to BSVI emission norms.

The key trigger for the stock is improving expectations of volume growth. After four consecutive quarters of de-growth due to the economic slowdown and higher cost ownership, there has been a marginal uptick in volumes since the start of the festive season in October. Most brokerages have increased their volume estimates for FY20. While year to date Maruti has reported a volume fall of 20 per cent, analysts expect the company to post a decline of about 13 per cent for the full year.

While bottoming out of volumes is positive, the company has also been able to keep its inventory levels under check. Analysts at Sharekhan say that the company has corrected excess inventory with dealers and the dealer stock has come down from about 45-50 days in September 2019 to less than 30 days currently. Further after nine consecutive months of production cut, the company has raised its production by 4 per cent in November 2019. While worst seems to be over for Maruti Suzuki, sustained recovery would take time, they add.

Another positive for the company is that discount level which had hit record levels in the September quarter are trending down and remain lower than those prevailing in the festival season this year as well as December of 2018. With price increases and new launches, pricing trends are expected to improve from January 2020.

The transition to BSVI which will entail price increase of up to 12 per cent is also expected to be less bumpy for Maruti as compared to peers. Analysts at BofA Global Research say that for Maruti the risk is much lower as an estimated 60 per cent of the products have already transitioned BSVI this year itself. Only the diesel portfolio and few petrol vehicles are yet to transition while the same for peers is much higher.

The company’s margins which had dropped to a 26 quarter low in the September quarter is also expected to improve due to cost reduction programmes, lower input costs, improving volumes and stable pricing. Analysts at BofA Research expect margins to improve to 13 per cent over the next couple of years from the FY20 estimate of 11.4 per cent.

There are however some risks especially related to the diesel portfolio which the company is not very keen on. Maruti gets about 25 per cent of its volumes from diesel variants and given the lack of options in BSVI from the company there could be some loss of customers opting of diesel vehicles. What could impact its market share is planned new launches by competition such as Kia, a sister concern of Hyundai.

Brokerages such as JP Morgan, however, believe that the company would be able to post earnings growth next year on recovery in volumes along with high operating leverage in the business, easing of commodity costs (steel prices) and receding discounting levels.

While there are multiple positives, the stock is currently trading at 23 times its FY22 estimates which is at the higher end of its historical average and leaves little upside from the current levels. Investors could look at the stock on dips.