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Last Updated : Mar 18, 2019 12:32 PM IST | Source: Moneycontrol.com

Maruti Suzuki: Subdued demand leading to significant production cut

MSIL is estimated to have cut its March production target to 126,000 units, down 26.8 percent as compared to the same month last year, which is a big drop given it achieved double-digit growth in the last four years

Nitin Agrawal @NitinAgrawal65
 
 
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Passenger vehicle (PV) have been facing myriad challenges on the back of mandatory long-term third-party insurance, liquidity crunch and increasing acquisition costs on the back of new safety norms and uncertainty regarding the implementation of Bharat Stage VI emission norms. All of these factors have led to subdued consumer demand. In fact, demand was muted during the festive season last year and at December-end, which is considered to be a seasonally strong season.

Maruti Suzuki India (MSIL), the leader in this space, has posted a meagre year-on-year (YoY) volume growth of 6.7 percent in the last 11 months of the current fiscal as compared to a 13 percent year-on-year growth it achieved in the whole of FY18. In fact, the auto major witnessed a YoY decline of 0.6 percent in Q3 FY19.

Weakening demand has led to an inventory build-up at the dealer level. According to Federation of Automobile Dealers Association of India (FADA), PV inventory is as high as 45-50 days. This has repercussion on productions of companies. As per an Business Standard report, MSIL is estimated to have cut its March production target to 126,000 units, down 26.8 percent as compared to the same month last year, which is a big drop given it achieved double-digit growth in the last four years.

Demand in the near term is expected to be sluggish. However, the long-term outlook continues to be very positive. Strong demand is expected to come from urban areas on the back of very low penetration and rising disposable income. Demand will get an additional kicker from the rural market, led by government’s focus toward rural areas ahead of general elections and increase in minimum support prices (MSP).

In light of subdued demand outlook, the stock has corrected quite significantly and is down 31 percent from its 52-week high. We, however, advise investors to accumulate this in a staggered manner as the long-term outlook continues to be very positive and MSIL is a very strong franchise.

For more research articles, visit our Moneycontrol Research page

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here.
First Published on Mar 18, 2019 12:32 pm
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