Sales to emission norms: Issues Maruti Suzuki investors should watch for

Management anticipates 4 - 8 per cent sales growth in FY20; analysts say this is the weakest guidance in at least five years

When the market leader among passenger vehicles - Maruti Suzuki (MSIL) - says 2019-20 (FY20) will be an unpredictable year, investors too, should keep their expectations mellow from the MSIL stock.

MSIL stock, reacting to weak results, lost about 1.5 per cent in Thursday’s trade. While revenues and net profit at Rs 21,460 crore and Rs 1,796 crore, respectively, were in line with Bloomberg consensus, the question is how much of March quarter’s (Q4’s) pain will spill over into FY20.

Operating margins, which fell from 14.2 per cent a year ago to 10.6 per cent in Q4, have little upside trigger, considering the tepid demand outlook. Sequentially, though, operating margin has improved by 73 basis points (bps). This improvement may be sustained, if raw material costs continue to remain benign.

Raw material cost as percentage of sales reduced from 54 per cent in December quarter to 45 per cent in Q4. While the current realisations (revenue per car sold) may have declined to Rs 4.452 lakh, from Rs 4.59 lakh a year ago, reduction in average discount by 7–10 per cent (Rs 15,125 in Q4) should aid profitability.

However, in the context of high competition, it needs to be seen if MSIL can put a lid on its advertising spends. While other expenses (sales and marketing) have sequentially cooled off by 50 bps to Rs 14 crore in Q4, the trend’s sustenance will be a key monitorable.

If these factors play out in favour of MSIL, Ankit Merchant of SMC Capital says the company should scale back its operating margins to the 11–12 per cent level in FY20. For investors, this is incremental improvement from last year’s performance. But more is needed to regain its 14–15 per cent margin level seen prior to 2018-19.

All that, though, heavily hinges on MSIL’s promise to meet the 4–8 per cent growth guidance. The larger uncertainly is whether there will be pre-buying ahead of introduction of the new emission norms (Bharat Stage-VI, or BS-VI) or customers will defer their purchases to buy eco-friendly cars. The BS-VI norms, applicable to the entire automobile sector, will hit the floor on April 1, 2020.

“The entire industry may witness a reset in demand,” says Merchant. Also, with diesel variants, accounting for nearly a fourth of its volumes, possibly phased out from April 1, 2020, its likely impact on MSIL’s overall demand compound the problem. 

With these uncertainties around, analysts say investors should wait for better entry points to buy the MSIL stock, even if valuations at 21x FY20 earnings are attractive.