Maruti Suzuki stock down on weak Q2; what's the road ahead?

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Maruti Suzuki stock down on weak Q2; what's the road ahead?

Maruti Suzuki disappointed the street with much lower than expected second quarter results; the stock slid over 5% early on Monday as investors went for the exit.

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ALSO READ News and Notices about Maruti Suzuki See interviews with Maruti Suzuki Management See what other Experts & Brokerages are saying about Maruti Suzuki See previous Results of Maruti Suzuki Maruti Suzuki BSE | NSE 31/05/12 Are Mutual Funds betting on Maruti Suzuki?

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Maruti Suzuki disappointed the street with much lower than expected second quarter results; the stock slid over 5% early on Monday as investors went for the exit. While the labour dispute at its plant in Manesar sent production and sales for a toss, appreciating Japanese yen and higher discounts offered to push up sluggish demand for passenger cars, put pressure on margins in July-September.

Maruti also faces tough times ahead as competition has become intense in its bread and butter small car segment, while demand still remains muted amid expensive loans and high fuel prices. Analysts are also seen cutting estimates to factor the yen appreciation.

The India's largest passenger car maker saw its net profit slide 60% year-on-year to Rs 240.44 crore and net sales fell 15% to Rs 7,537.45 crore in July-September. This was sharply lower than analysts expectation of Rs 410 crore net profit on revenue of Rs 7,688 crore.

"Second quarter saw a bunching up of multiple negatives for Maruti...We expect continued competition pressures on Maruti in the coming quarters post the recent small car launches by Hyundai and Honda, and expect margins to remain under pressure in second half as well due to weak pricing power and the full impact of yen appreciation," said CLSA Asia Pacific analysts Abhijeet Naik and Nitij Mangal.

Sachin Gupta and Chetan Vora of Edelweiss Securities also gave a thumbs down to Maruti's second quarter performance, which saw EBITDA margin drop to 6.3%, its lowest in the past seven years. The appreciation in yen hurt margins on high royalty and raw material costs, they noted.

"While demand for petrol cars is sluggish, the full impact of yen appreciation on imported raw material is likely in second half of fiscal 2012 when the forex exposure is unhedged. Our sensitivity suggests if yen stays at the current level, it can affect EBITDA margin by 160bps in third quarter [October-December]," the Edelweiss analysts said.

They have a "reduce" rating on Maruti, with a target price of Rs 1,060 on the stock. CLSA has a "underperform" on Maruti with Rs 1,075 price target.

Standard Chartered cut its fiscal 2012 earnings forecast on Maruti Suzuki by 28% and fiscal 2013 forecast by 6%. It, however, maintained an "outperform" rating on Maruti, with a target price of Rs 1,425.

Standard Chartered analysts Amit Kasat and Aniket Mhatre said the stock was attractively valued and expect a better fiscal 2013 on strong volume outlook, improved localization and relatively stable macro economy.

By 11:30 hrs on Monday, Maruti shares had recovered some of their losses, but were still trading down 1.1% at Rs 1,114 on NSE. The stock is down near 11% since April this year.

Nachiket Kelkar
nachiket.kelkar@network18online.com