Maruti Suzuki stock slips 5.2% to hit 52-week low on production cut worries

The sector has been pressing the government for a reduction in the goods and services tax

The Maruti Suzuki stock slid by 5.2 per cent to hit its 52-week low on Monday on worries that a slowing demand environment, production cut, and declining sales could lead to further downgrades. The company has cut vehicle production for the fifth consecutive month in a row. 

The company posted a 16 per cent year-on-year fall in passenger vehicle sales in June and a 21 per cent fall in sales in the June quarter. Analysts have sharply downgraded their volume estimates for 2019-20 (FY20) from single-digit growth (5-8 per cent) to flat volume performance. The impact on the sector could be even worse, as it is expected to report a fall in overall volumes in FY20, compared to the previous year. 

Kapil Singh and Siddhartha Bera of Nomura have lowered their passenger vehicle industry volume estimates for the current financial year, from 5 per cent to minus 2 per cent on the back of slower economic growth. They expect rising regulatory costs to impact growth over the next couple of years. 

The sector has been pressing the government for reduction in the goods and services tax, from the current 28 per cent. 

In addition to slowing demand, higher insurance costs, liquidity issues at the dealers’ end as well as consumer loans, the rise in excise duty on petrol and diesel announced is expected to push up the running costs. This could be a dampener for the sector reeling from demand blues. 

While companies have reported muted walk-ins, the transition to the Bharat Stage-VI norms next year has led to a number of potential buyers deferring their purchases. The only positive for the market leader is the fact that it continues to maintain its market share at 52 per cent and the proportion of diesel vehicles in its mix is lower than peers.  

While volume growth has not picked up, analysts are waiting for the festival season in October to gauge whether there will be an uptick in volumes. Given the flat volume growth and rising competition in the utility vehicle category, analysts believe Maruti could see earnings downgrades to the tune of 10-15 per cent in the current financial year. Expect the stock that has slid below the Rs 6,000-mark intraday after a gap of over two and a half years to trade weak, as the volume downcycle is likely to continue in the near term.