Strong product portfolio, increased localisation, reduced FX exposure and capex-light business are the reasons brokerages are upbeat on Maruti Suzuki.
The Indian auto industry is going through a slump, its worst in many years. Vehicle sales are down and inventories are bloated, forcing a cut in production, putting thousands of jobs on the line.
The country’s leading automaker, Maruti Suzuki India (MSIL), is suffering too. For the June quarter, the Delhi-based company reported a 27.3 percent year-on-year decline in profit along with an 18 percent YoY drop in sales.
July was worse. Sales plunged 36 percent YoY, the biggest decline in over two decades, forcing the company to cut production by 25.15 percent, sixth month in a row that such a measure had been resorted to.
It cut temporary workforce by 6 percent in the first six months of 2019 compared to the same period last year. The automaker is also looking at just one shift at all its plants, as demand for cars continues to drop and unsold vehicles pile up.
But brokerages remain undeterred. They expect the company to return up to 30 percent on the back of a strong product portfolio, increased localisation, reduced foreign exchange exposure and capex-light business.
Five reasons why they are not giving up on Maruti Suzuki just yet:
EV pact with Toyota
Earlier this year, Suzuki Motor Corporation, the majority owner of MSIL, signed a deal with Toyota to jointly produce and sell cars across the world.
The wide-ranging pact will provide Maruti access to Toyota’s technology for electric vehicles (EVs) and high-performance hybrid vehicles."The combination of Suzuki and Toyota’s global volumes should provide significant scale, making technology more affordable, especially for a price-sensitive market like India," brokerage Motilal Oswal said.
The company is testing around 50 EV prototypes in the country.
Taking the green route
Maruti’s focus on compressed natural gas and hybrid powertrain vehicles, till electric vehicles become affordable, should help it stay ahead of the curve, as the government continues to push for an eco-friendly approach.
The company expects 50 percent growth in CNG vehicles in FY20 on the back of a 40 percent growth in the previous fiscal, said Motilal Oswal.
Its focus on CNG and hybrid vehicles will provide a smooth segway for Indian consumers before they go completely green.
In line with emission norms
Maruti Suzuki has been the leader when it comes to emission norms. It made four models BS-VI compliant even before emissions norms were introduced in the national capital.
The automaker now has six—Alto, Baleno, Wagon R, Swift, Dzire and the newly introduced Ertiga MVP—BS-VI compliant models.
MSIL will ensure all its models are BS-VI compliant by the end of the year, brokerage firm Anand Rathi said.
A turn away from diesel
With BS-VI norms expected to kick in 2020, the auto industry has shifted its focus to petrol vehicles, which account for 66 percent of the industry volumes.
Maruti, a pioneer of diesel cars in the country, has also expanded its petrol portfolio. Petrol cars constituted 78 percent of MSIL’s portfolio in Q1FY20, up from 72 percent in same quarter last year.
"Diminishing gap between petrol and diesel fuel prices and rise in the cost of diesel vehicle post-BS-VI implementation would continue to lower the mix of diesel cars in the coming years," said Anand Rathi.
Maruti may not completely vacate the diesel space. It is evaluating 1.5-litre diesel engine for BS-VI compliance.
Brokerages expect normalcy in volumes to return with the extended festival season that kicks in in a few weeks.
According to Anand Rathi, MSIL’s competitive advantages like strong brand and distribution network with 2800+ distribution centres and seven blockbuster models should revive growth stepping into the festival season.
"We believe the upcoming festive season along with the launch of new models should have a positive impact on volumes in 2HFY20. We remain optimistic on MSIL for the long term," said the brokerage.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.