Trouble ahead: Why Maruti Suzuki’s woes may not be short-lived

While most brokerages have cut FY20 earnings estimates by up to 13% for Maruti Suzuki (MSIL), owing to its poor fourth quarter results and its plan to stop production of diesel vehicles starting next fiscal, there are other factors, too, which will keep the company’s volumes under pressure.

High base effect in the first quarter of FY19, no proposed launches and challenges posed by new launches by competitors are some of the factors which will keep the company’s volumes under pressure in the coming quarters.

MSIL last week reported a 4.6% year-on-year (y-o-y) decline in net profit to `1,795.6 crore for the quarter ended March 2019, and the company’s operating profit margins contracted for the fifth consecutive quarter by 365 basis points y-o-y to 10.55%.

Sales volume during the first quarter of FY19 had grown by 25%, therefore, during the first quarter of the current fiscal, the company will be up against a high base at a time when sales are weak.

According to Jefferies, the high base along with the company’s decision to make its production lines BS VI-compliant ahead of the April 2020 deadline will remain a drag.

In fact, the management has also acknowledged that production planning in FY20 is a challenge on account of new regulatory safety norms and BS VI implementation. The company has already launched the BS VI version of its hatchback Baleno and Alto, well ahead of the deadline, leading to increase in price.

Starting April 1, 2019, the government has mandated carmakers to instal anti-lock braking system in all models, which has jacked up prices by 2-6% depending on engine capacity.

While the management has indicated that the company will grow faster than the industry, it has a weak launch pipeline. Meanwhile, competitors are upping the ante. For instance, Hyundai is scheduled to launch its sub-compact sports utility vehicle, Venue, to compete with MSIL’s Brezza in May.

Analysts also expect that MSIL may lose customers to rival brands such as Hyundai and Mahindra & Mahindra which will continue to produce diesel variants of their cars.

However, it will be interesting to see what impact will price increase post-BS VI have on demand for diesel cars.

Currently, diesel cars are typically expensive by `1-1.5 lakh compared with their petrol variants. However, this price difference is likely to widen to `2.5-3 lakh when vehicles are upgraded to meet higher emission guidelines.

Maruti Suzuki India Limited