Maruti Suzuki share down by Rs 100 on Dalal Street: Experts explain why it happened

This negative sentiment is despite, Suzuki entering into an agreement with Japan-based Toyota Motors for considering concrete collaboration in new fields. Interestingly, experts have raised a red flag on Maruti due to its passenger growth in future.

Karvy reteriates that, since June 2018, Maruti has witnessed demand slackness. Photo: Reuters

On Friday’s trading session, investors dampened Maruti Suzuki share price to quite an extent, so much, that the passenger car maker lost over Rs 100 of its market price. In early hours of opening, Maruti touched an intraday low of Rs 6,580, resulting in nearly over 1.50% drop on Sensex. The company ended at Rs 6,680 per piece on Wednesday. However, at around 1302 hours, Maruti was trading at Rs 6,613.90 per piece down by Rs 66.90 or 1% on Sensex. This negative sentiment is despite, Suzuki entering into an agreement with Japan-based Toyota Motors for considering concrete collaboration in new fields. Interestingly, experts have raised a red flag on Maruti due to its passenger growth in future.

On Wednesday, in a filing to exchanges, Maruti said, “Toyota and Suzuki, in addition to bringing together Toyota’s strength in electrification technologies and Suzuki’s strength in technologies for compact vehicles, intend to grow in new fields, such as joint collaboration in production and in the widespread popularization of electrified vehicles.”

After meeting Maruti’s management, Karvy Stock Broking firm, highlighted that, the company plans to continue with its philosophy of industry leading volume growth supported by profitability. Management anticipates demand visibility in the near term to become clear post Q1FY20 onward. Timely arrival of Monsoon and favorable General Election results in India also likely to influence the PV industry growth during H2FY20.

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However, Mahesh Bendre analysts at Karvy Stock Broking said, “We believe PV industry to turnaround from Q1FY20 onwards on account of favorable base and likely pre-buying.”

Karvy reteriates that, since June 2018, Maruti has witnessed demand slackness. It added, “We anticipates PV demand to firm up post June 2019 on account of a) favorable base and b) pre-buying as PV prices in India are expected to go up from April 2020 on account of implementation of safety regulations and BS-VI compliant engines in India.”

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Currently MSIL offers 11 Brand models in PV segment. Over the medium term, the Company plans to launch two new models every year. The company currently has ~2627+ outlets in the country covering ~1850+ cities.

Going forward, it plans healthy expansion in the same by FY22. The company has received phenomenal response to its new Ertiga which has currently 6 months waiting period.

However, Bendre said, “While long term growth outlook for MSIL remains positive given the 4W under penetration in India and MSIL’s competitive advantages like strong brand and distribution network, we believe near term concerns on volume growth and margins persist. We forecast 16.1% earning CAGR over FY19-21E. MSIL stock has declined by ~18% over the last 12 months on account of volumes slackness followed by reporting single digit EBITDA margin during Q3FY19 (lowest in last 24 quarters).”

Though Karvy is structurally positive on MSIL, however, Bendre says, “near term concerns on volume growth and margins persist. We believe margin recovery will take at least 2-3 quarters while volume growth also softens.”

Thereby, Bendre adds, “We maintain our SELL rating on the stock with target price of Rs 6791 (PER of 21xFY21E earnings – 7 year 12M forward average PE).”

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