Maruti Wows Car Buyers, But Investors Dump Shares


Maruti Suzuki created a buzz in the recently concluded Auto Expo with Vitarra Brezza, its upcoming subcompact SUV. Domestic brokerage Religare termed the country’s biggest carmaker as the “showstopper” at the Expo. Yet, Maruti shares have been falling over the last several weeks. In the last three months, Maruti shares have corrected by 25 per cent as compared to 8.5 per cent fall in the broader Nifty. Earlier this week, two brokerages – Jefferies and Goldman Sachs – cut their targets on Maruti shares sharply.

What’s Hurting Maruti Suzuki?

1) Earnings Miss: Maruti’s EBITDA margin declined sequentially to 14.4 per cent in Q3, missing consensus estimates. Low margin on new launches (S-Cross), higher discounts to clear inventory ahead of the year-end and promotions on new models impacted Maruti’s margins in the December quarter, analysts say. Domestic brokerage IIFL said Maruti’s market share and margins may have peaked.

“Competitive intensity is increasing after a three-year lull. On the one hand, demand for old models is not improving, elevating discounts and promotions. On the other, Maruti’s new models are in the premium segment where existing high competition will cap its pricing power,” IIFL added.

2) Adverse Currency Movements: Maruti’s margins are likely to remain under pressure because of the appreciation in Japanese yen, which has gained 11 per cent against the rupee in the last three months. A weaker rupee adversely impacts Maruti because over 20 per cent of its costs (royalty payment, cost of raw material, etc.) are yen-denominated. According to Ambit, every 1 per cent appreciation in the yen (versus rupee) negatively impacts Maruti’s EBITDA margin by close to 20 basis points and net earnings by 9 per cent.

Ambit downgraded Maruti’s FY17 EBITDA margin expectations by 120 basis points to 14.8 per cent versus 15.7 per cent EBITDA margin in FY16. The brokerage also cut its target price on Maruti to Rs. 4,400 versus Rs. 4,750 earlier.

3) Royalty Payouts in Focus: Analysts say rising royalty payments to parent Suzuki have also pressured Maruti’s margins. Proxy advisory firm Institutional Investor Advisory Services (IiAS) last year said that Maruti’s royalty payment has jumped from 13 per cent of profit before tax and royalty in 2005-06 to 36 per cent in 2014-15.

“Maruti has flip-flopped on royalty payouts a number of times in the past few years in order to accommodate Suzuki’s demands. For instance, they increased royalty payouts to account for the rupee-yen exchange rate fluctuations: but why did Maruti’s board cave into absorbing all the exchange losses?” IiAS said on Thursday.

Despite the recent correction, only one of the 48 analysts that cover the company has a “sell” rating on the stock. Analysts say Maruti will benefit from its dominance in a country where vehicle penetration is low.