Maruti beats estimates, yet stock tanks; experts discuss

 Anuj: What is your reaction to the kind of stock move that we have seen on Maruti?

A: I do not see any reason for such a negative reaction to this development per se. If you look at the developments that have been happening in the stock in last couple of months, people were so much gung-ho that Suzuki might do a buyback on the stock, that too at a premium price. You were respecting the stock on that aspect, now suddenly when you are seeing that Suzuki is converting and Indian arm as a CRAMS entity through Maruti you are disrespecting the entity in such a huge extent.

I think both the sides are completely unjustified. Positive side is if you see what the prime concern is Suzuki will pocket out a part of the margin because it will be manufactured through its own plant through Gujarat and they will have to sell it on a cost pass through basis to Maruti. But if you look at historical margin trend of Maruti, it is very much volatile.

Labour troubles and other uncertain aspects always remain. This will take care of only those uncertain things in Suzuki parents' pocket rather than Maruti Suzuki's. So relatively that will be a stable cost of sourcing kind of stuff for Maruti rather than bearing the risk of labour troubles which have impacted them for almost couple of years in last 3-4 years and so, one should not take it in such a negative sense per se.

Sonia: If you believe this whole move on the downside could be unwarranted, what would your view be both on the stock as well as margins at 12.4 percent this quarter around, do you think those will be sustainable with this new model?

A: First of all the Gujarat plant getting operational and contributing a substantial part of the overall product mix is a distant thought process. I do not think it is going to materialise before FY18, so it is almost four years from now. Maybe they will convert that as the prime export hub which Suzuki has been saying that through India they are going to address several emerging market export hubs.

Presently, the kind of products Maruti is exporting from India relatively for lesser realisation compared to domestic products like Dzire, Ertiga and to be launched XA Alpha, so margin-wise this quarter, 12.4 percent is pretty much in line. We were expecting around 12.2 percent. It is 200 bps better-than-expected. Though at a gross level it was slightly disappointing, but below gross employee cost did a substantial drop Q-o-Q so do the other expenses. Broadly, this quarter results were pretty much okay.

We were expecting somewhere around Rs 700 crore, consensus was around Rs 640 crore, so it is in between. Result was pretty much fine and I do not think one should take this development so negatively and it is a distant future thing. First of all one should let a few quarters of Gujarat revenue mix become substantial then one can see what kind of margin impact is happening.

Anuj: What is your call on Maruti stock now? How would you approach it? What is your price target?

A: Our price target based on FY16 is around Rs 2,200 and we are pinning big hopes on the new model launch of XA Alpha which with the success of EcoSport and Duster, that is the happening segment which Maruti will be launching somewhere in the end of FY15. So definitely that will be the order of the day to drive the stock down the line. Though at around Rs 1,700, we were expecting the stock to remain stagnant but today's correction is giving some opportunity to see some 10 percent upmove again back to Rs 1,650-1,700 levels.

Yaresh Kothari, Auto analyst, Angel Broking

Sonia: The stock was down 7 percent. There will be contract manufacturing from Suzuki. Suzuki will fund the plant, there will be a 100 percent subsidiary setup but what is the market actually worried about at this point in time and what could be the impact on margins?

A: The main concern that the street is having is that why a change in the view right now because in the last three years the company has expanded the capacity at Manesar plant. Even before this when they had talked of Gujarat plant it was supposed to be done under Maruti Suzuki. So, what has led to the change in the policy now that has to be looked at. That is the major concern.

Sonia: When this contract manufacturing actually comes into play, what kind of damage do you think it could do to the margins for Maruti. Will they just be marketing margins that Maruti will get, will it be like a huge reduction in your mind?

A: It is very difficult to talk about it because we need clarity on the arrangement that Suzuki will be having with Maruti. However, in case of Mahindra and Mahindra (M&M) we have seen that in contract manufacturing there was some impact on the margins with Mahindra Vehicle Manufacturers limited (MVML) coming in and M&M sourcing from MVML. So, we have a instance of margins getting impacted in case of Mahindra and Mahindra. However, in case of Maruti we first need to look at the arrangement and more clarity from the management to conclude the exact impact on the margins.

Sonia: What would your call be on the stock now? At this point in time post the numbers and the prima facie details that you heard from the management, what should one do with the stock?

A: One should hold the stock because if I look at the operating performance for the quarter it was very strong results. The margins were maintained at 12.4 percent compared to 12.6 sequentially. So overall, the results have been good but because of the announcement there has been a reaction in stock price. We would like to wait for more clarity on this front.

Anuj: Any clue on why they are doing this because they are saying that all the vehicles will be sold to Maruti Suzuki. They are also saying the land for the project will be leased by Maruti to subsidiary company and the subsidiary company would always remain a 100 percent Suzuki company. Is that enough to spook the stock that we have seen about 7-8 percent fall and about 11 percent fall from days high?

A: It is surprising that there were no such talks earlier and suddenly the announcement has been made. So, I am not able to understand the reason. We will wait for more clarity.

Sonia: Since you have seen this happen with the likes of M&M in the past where they have done contract manufacturing, sourcing from MVML and they have seen further reduction in margins. As and when this plays out will all the upsides from this new plant go to the parent?

A: It will depend on the arrangement that they have. So, clarity on the arrangement front would be important to comment on it.