Maruti Suzuki India Ltd (Maruti) stumbled over a plethora of challenges that disrupted its March quarter(Q4FY20) performance. And, things may only get worse before they improve in the long run.
Q4 performance was hit by weak demand, relatively higher discounts, besides an adverse product mix with a lower share of diesel vehicles. In addition, there was the transition to BS-VI to grapple with, followed by the covid-19 outbreak and related lockdowns.
That Q4 sales were lower by 16% year-on-year (yoy) was already known to analysts. A bigger disappointment was the 1.3% drop in average realisation per vehicle.
A key factor that dragged realisations down after many quarters is that the company has stopped production of diesel vehicles, which enjoyed higher realisations. Further, BS-VI transition entailed higher promotional expenses that added to costs. On top of it, discount per vehicle too rose to Rs19,051 from Rs15,125 a year ago.
The upshot: earnings before interest, tax, depreciation and amortisation (ebitda) margin at 8.5% fell by 200 basis points (bps) yoy and 120 bps lower than Bloomberg’s estimate. “Maruti’s margin performance was at its lowest point since Q3FY13 and came as a significant negative surprise,” stated a note by ICICI Direct Research.
Ebitda fell by a sharp 31.7% yoy to Rs1,546.4 crore. Again, this was far lower than Bloomberg’s 18-analysts’ consensus of Rs1,779 crore.
Importantly, the company’s woes do not end here. Maruti, along with other auto original equipment makers (OEMs) opened FY21 on a grim note with zero sales in April, following the covid-19 led lockdown.
“After complete nationwide lockdown in April, we expect some easing in restrictions during May and June. So, Q1FY21 would be a complete washout with ~73% YoY decline in volumes,” said Mitul Shah, vice-president, research at Reliance Securities Ltd.
This is not all. Industry experts are apprehensive of a quick production restart. Although covid-19 may push passenger car sales, given the fear among commuters to use public transport, affordability due to pay cuts and job losses is questionable. Also, it will take a few quarters to streamline the disrupted supply chain and dealer network, some of who are on the brink of bankruptcy post the virus pandemic.
For companies such as Maruti, high growth in exports is unlikely given the plummeting demand in overseas markets too.
So, it is not surprising that analysts are factoring flat earnings in FY21 in a best case scenario. Maruti’s stock shed the gains made over the last two days after news that production had resumed in one of its facilities. In spite of this, at Rs5,000 the stock trades at about 30 times the estimated earnings for FY21 capping near-term upsides. Its rich valuations, however, are supported by its market leadership, strong parentage and cash flows that could weather any storm.
