Maruti Suzuki's Q3 margins to be hit by sluggish demand, higher costs

Automaker is expected to report year-on-year fall in volumes in December, adding pressure to the stock

The stock of India’s largest car maker Maruti Suzuki slipped 4 per cent on worries that sluggish demand, higher costs will impact revenue and margin performance in the December quarter. The stock has shed 26 per cent since the start of the year, as brokerages have cut their earnings estimates on multiple headwinds for the company.

An analyst at a domestic brokerage indicated there could be further pressure on the stock, given sharp slowdown in volumes and heavy discounts on models. 

Further, analysts are worried that the company’s announcement of increasing the prices of cars from January 2019, at a time of muted demand, could impact sales.

The automaker indicated that its costs have been adversely impacted by the increase in commodity prices and foreign exchange rates. While the company may not pass on the costs fully, analysts believe even a small increase at a time of falling demand could derail buyer sentiment. 

Led by a 11-23 per cent year-on-year fall in its mini and compact segments, Maruti reported a 12.6 per cent decrease in overall volumes for November. 

The company had reported flat sales in October. Given the muted festival season and demand trends, analysts believe sales in the current quarter are expected to be flat-to-negative. In the fiscal year-to-date, the company’s sales are up 7 per cent. 

 

While analysts expect prospects to improve over the medium term as demand revives, the near-term outlook remains muted on sluggish demand and higher competition. Analysts at CLSA expect the company to report weak margins in the December quarter on account of higher discounts and full impact of adverse forex changes. 

While the demand pressure is expected to taper off and cost of ownership is expected to moderate with lower fuel prices, the Street will keep an eye on volumes in December, given the higher inventory. 

So far, there is no indication of improvement, which is critical for the stock to reverse its losing streak. While it trades at about 23 times its FY20 earnings estimates, and valuations are in line with its four-year average, investors should wait for volume triggers before taking an exposure.