Maruti Suzuki India, the country's largest car manufacturer, lost its 30 percent market capitalisation in last eight months and underperformed its sector as well as benchmark index.
The stock had hit a life high of Rs 9,922.85 on July 24, 2018, when the market capialisation was nearly Rs 3 lakh crore and now at current market price, it is around Rs 2.09 lakh crore.
In the last eight months, Nifty Auto index plunged close to 20 percent as compared to Nifty's gain of 2.6 percent.
The company management had been saying for last few months that demand would pick up but their strategy including discounts did not work due to lot of issues which directly hit the demand of passenger vehicles.
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NBFC liquidity crisis and muted demand during festive season also hit auto industry.
Mandatory long-term third-party insurance and increasing acquisition costs on new safety norms and stricter Bharat Stage VI emission norms also plagued the stock performance.
As per latest news reports, weak demand has forced the company to cut its production by 26.8 percent in March (considering inventory of around 3540 days), which is in sharp contrast to a positive trend in the past several years.
Sales volume in current financial year (April 2018-February 2019) increased at a slower pace, up 5.3 percent against 13.3 percent growth in same period last year. Domestic sales grew 6.7 percent and exports de-grew 13.8 percent during April-Feb period against 14.3 percent and 1.6 percent, respectively, in corresponding period last year.
When the stock had started to trade around Rs 8,000-9,000 levels, most Indian as well as foreign investors placed the target for the stock in five digits, saying it could cross Rs 10,000 mark but that hasn't happened till now.
The recent release on retail sales growth and dealer inventory by the Federation of Automobile Dealers Associations indicated demand is much grimmer than what analysts highlighted in Dealer check. Key takeaways from the release were 1) retail sales slid 7–10 percent YoY in February across sub-segments, and 2) Inventory days as on 13th March for passenger vehicles (PVs) are 50–60 days.
High inventories and discounts would put margins under pressure across the spectrum.
Edelweiss Securities believes that demand weakness could protract given overall weak income levels, tighter finance availability and lack of new products.
In a weak demand environment, the auto industry may not witness strong pre-buying due to BSVI implementation, which most OEMs are guiding for, it said.
Recently, Kotak Institutional Equities downgraded its rating on the stock to add from buy earlier and also slashed price target to Rs 7,500 from Rs 7,600 apiece after cut in earnings per share estimates.
The domestic passenger vehicle (PV) industry is likely to grow in low single digit (6 percent CAGR over the next two years) due to increase in costs related to stricter safety and emission regulations, it reasoned.
"While Maruti is better-placed and will gain market share, we cut EPS estimates by 4-9 percent for FY2019-21 mainly driven by cut in volume estimates (lower industry growth assumptions) and EBITDA margin forecasts (factoring in lower operating leverage and higher costs related to safety regulations in entry-level models), it said.
While having hold rating on the stock and advising to wait till ground data reverses, Sameer Kalra, Founder & President (Research) at Target Investing told Moneycontrol that Maruti Suzuki stock fall will continue as the company and sector is facing demand slowdown.
"The registrations of passenger cars have reduced by 21 percent MoM in February 2019. This comes post heavy discounts which are near peak discounts and new model launches which are seeing lower response. In addition to this past couple of Uber & Ola were large growth drivers which have slowdown due to financing barriers," he said.
Astha Jain, Senior Research Analyst at Hem Securities also expects the stock to fall further as company is estimated to have cut production to around 1,26,000 units as compared to more than 1,72,000 units a year ago.
"This in turn is signalling the lower demand and will act as a dampener in profitability of company going forward," she said.
In quarter ended December 2018, the company reported a 17 percent YoY decline in profit to Rs 1,489.3 crore dented by adverse commodity prices and forex rates. At operating level, it also reported dismal performance with EBITDA (earnings before interest, tax, depreciation and amortisation) falling 36.4 percent and margin contracted sharply by 600 bps YoY.
Astha said the demand is lower on back of various reasons like in metro cities with growing popularity of Cabs & availability of better public transport, demand of passenger vehicles is lowering down.
Also CY18 being the year of not very good monsoon with IL&FS crisis, NBFC sector has faced serious problems thus impacting auto sector as a whole, she added.
She expects the stock to loose another 5-8 percent from current level before making any base, hence advising investors not to buy at current level.
While maintaining neutral rating with a price target at Rs 7,022, Naveen Kumar Dubey, Research Analyst at Narnolia Financial Advisors said the demand scenario may remain under pressure due to 10-15 percent further increase in cost of ownership because of upcoming safety norms.
Technically, Prashanth Tapse, AVP Research at Mehta Group is negative on the stock, citing bearish pattern on the chart.
"We can see in chart has made a bearish double top pattern and we can also see ADX is below 20 which show that there is no strength in the recent trend, which further confirms that the stock is in consolidating phase and expect to move in sideways range with crucial support near Rs 6,500 & resistance near Rs 7,195," he said.
For long trades it is better to trade in this stock only when its near above support levels, he advised.
Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. First Published on Mar 19, 2019 01:04 pm
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