Maruti goes downhill on muted Q1 earnings, worries over Gujarat unit deal

Maruti Suzuki to take over the Suzuki Motor stake in Gujarat EV manufacturing facility.

Shares of Maruti Suzuki India Limited (MSIL) lost nearly 2 percent to Rs 9,660 at 9:20am on August 1 on concerns over the cash buyout of Suzuki Motor stake in Suzuki Motor Gujarat (SMG). The Q1 numbers too failed to match the expectation of most analysts.

The country's leading automobile manufacturer reported a 145.5 percent year-on-year (YoY) jump in its standalone net profit at Rs 2,485.1 crore during the first quarter on the back of larger sales volume, improved realisations, cost reduction efforts, and higher non-operating incomes.

Maruti announced that its board has approved the termination of the contract manufacturing agreement with Suzuki Motor Gujarat Private Limited (SMG) and it will acquire the shares of SMG from Japan's Suzuki Motor Corporation (SMC) in accordance with regulatory approvals.

RC Bhargava, Chairman of Maruti Suzuki India, said that Maruti Suzuki will take over EV production at the Gujarat unit, replacing Suzuki Motor. "EV production at the Gujarat facility will now be done by Maruti Suzuki, instead of Suzuki Motor Corporation. Acquisition of Gujarat Plant will be completed by FY24 end," he said.

The valuation of Suzuki's stake has not been determined yet, as it depends on the book value. The battery plant will remain separate from this deal, Bhargava said, adding that though they are open to purchasing the battery plant from Suzuki, a final decision has not been made yet.

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Several brokerages, however, remained upbeat on the company's first quarter earnings.

Motilal Oswal Financial Services Limited has said that stable growth in domestic passenger vehicles and a favourable product lifecycle augur well for Maruti. "We expect market share gains and margin recovery in FY24, led by an improvement in supplies, a favourable product mix and operating leverage."

Analysts at Nirmal Bang Institutional Equities are of the view that MSIL's plan to expand production will help it to increase its overall market
share. The company's increased focus on SUVs in its overall portfolio will boost margins. "We expect the sales momentum to continue in the coming quarters."

Also read: Can Maruti’ SUV drive trigger renewed optimism in the stock?

Brokerage firm Antique Stock Broking has said Jimny, Fronx, and Invicto, new additions in the SUV space, have plugged the product gap for the company in the UV segment. Analysts suggest that Invicto has an outstanding order book of 8,000 units in the first month of the launch. "It testifies MSIL's acceptance in the premium segment."

The company is also capitalising on easing supply constraints. As a result, the order backlog has reduced and helped normalise inventory to four weeks at 125,000 units.

Nomura has maintained a 'neutral' rating on the stock as the margin declined due to a rise in employee and marketing costs. Analysts at CLSA have a sell rating on the stock as EBITDA missed estimates and the current volume run rate is below the firm's estimates. Furthermore, if the company pays cash for the SMG acquisition, it could lead to a Rs 900 crore decline in other income in FY25.

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