 "4 reasons why Jefferies has downgraded Maruti Suzuki")
After a stellar run in calendar year (CY) 2015, Maruti Suzuki dipped over 3.5% on Monday to Rs 4,417 levels in late noon deals. Thus far in 2015, the stock has outperformed the market by gaining 38%, as compared to a 5% decline in the Sensex till October 1.
The fall on Monday comes on the back of a downgrade by global research firm Jefferies that has downgraded the stock to underperform from a buy rating earlier and slashed the target price to Rs 3,952 from Rs 4,976 earlier.
Also Read: Maruti's sales rise 3.7% in September, exports dip 26%
"The stock trades at peak multiples when profitability is also at peak. We aren’t comfortable any longer and reverse our long held Buy rating to Underperform," they said in their 5 October report.
Here are four reasons why Jefferies has downgraded Maruti Suzuki:
Changing capital allocation: Maruti Suzuki, according to the research house, has built its extremely profitable business through efficient manufacturing and a consistently well run distribution network. However, over the next few years, Jefferies believes that the company is set to change capital allocation in ways that make profitability unpredictable and open to risk.
Also Read: Maruti's agitating temporary workers chalk future strategy
"Maruti is set to reduce investments in manufacturing, in which it has long established credentials with support of a well-developed vendor base and increased investments in R&D, buying land for dealers and setting up a new distribution network for more premium cars (without an adequate portfolio). Whether all these succeed or not, the learning process will cost it money," the report says.
Also Read: Auto sector cheers RBI rate cut as 'festival gift'
Increasing focus on new segments: Maruti, Jefferies believes, is well positioned in small cars but lacks strength in the larger car segment. "Given that the average size of cars has been increasing for several years now, Maruti suffers from lack of brand associated with larger cars and will need to invest in pricing or otherwise. The attempt to set up a parallel distribution network is an effort to address this issue but has its own costs associated," the report suggests.
Forecasting numbers a challenge: Analysts are also unclear about the arrangement with Suzuki for the new plant that will supply cars from FY18. "There is no systemic benefit to Suzuki setting up the plant instead of Maruti and thus it is a zero sum game in which Suzuki holds the upper hand," Jefferies report says.
Also Read: Board approves pact for Gujarat plant
For now, analysts assume best case of no impact on Maruti's EBIT. They have cut FY16/17E EBDITA (earnings before depreciation, interest, taxes and amortisation) estimates by 3% to 92.3 and 106.4. EBDITA FY18E has been pegged at 115.2.
Valuation/Risks: Jefferies believes that though there are near-term positives for the stock, they have already been priced in. "Our FY16-18E estimates are 1-16% below consensus. The stock trades at all-time high multiples on peak profitability.
We downgrade to an Underperform, cutting target prive to Rs 3952, valuing the stock at 18x FY17E (cut from 22x to reflect higher risks)," Jefferies says.
The fall on Monday comes on the back of a downgrade by global research firm Jefferies that has downgraded the stock to underperform from a buy rating earlier and slashed the target price to Rs 3,952 from Rs 4,976 earlier.
Also Read: Maruti's sales rise 3.7% in September, exports dip 26%
Also Read
Govindarajan Chellappa and Apurva Kumar, analysts with Jefferies who have co-authored the report believe that investors don’t seem to be looking beyond its rather bright near-term prospects.
"The stock trades at peak multiples when profitability is also at peak. We aren’t comfortable any longer and reverse our long held Buy rating to Underperform," they said in their 5 October report.
Here are four reasons why Jefferies has downgraded Maruti Suzuki:
Changing capital allocation: Maruti Suzuki, according to the research house, has built its extremely profitable business through efficient manufacturing and a consistently well run distribution network. However, over the next few years, Jefferies believes that the company is set to change capital allocation in ways that make profitability unpredictable and open to risk.
Also Read: Maruti's agitating temporary workers chalk future strategy
"Maruti is set to reduce investments in manufacturing, in which it has long established credentials with support of a well-developed vendor base and increased investments in R&D, buying land for dealers and setting up a new distribution network for more premium cars (without an adequate portfolio). Whether all these succeed or not, the learning process will cost it money," the report says.
Also Read: Auto sector cheers RBI rate cut as 'festival gift'
Increasing focus on new segments: Maruti, Jefferies believes, is well positioned in small cars but lacks strength in the larger car segment. "Given that the average size of cars has been increasing for several years now, Maruti suffers from lack of brand associated with larger cars and will need to invest in pricing or otherwise. The attempt to set up a parallel distribution network is an effort to address this issue but has its own costs associated," the report suggests.
Forecasting numbers a challenge: Analysts are also unclear about the arrangement with Suzuki for the new plant that will supply cars from FY18. "There is no systemic benefit to Suzuki setting up the plant instead of Maruti and thus it is a zero sum game in which Suzuki holds the upper hand," Jefferies report says.
Also Read: Board approves pact for Gujarat plant
For now, analysts assume best case of no impact on Maruti's EBIT. They have cut FY16/17E EBDITA (earnings before depreciation, interest, taxes and amortisation) estimates by 3% to 92.3 and 106.4. EBDITA FY18E has been pegged at 115.2.
Valuation/Risks: Jefferies believes that though there are near-term positives for the stock, they have already been priced in. "Our FY16-18E estimates are 1-16% below consensus. The stock trades at all-time high multiples on peak profitability.
We downgrade to an Underperform, cutting target prive to Rs 3952, valuing the stock at 18x FY17E (cut from 22x to reflect higher risks)," Jefferies says.