[ad_1]
Maruti Suzuki India Ltd (Maruti) encountered a host of challenges that disrupted its performance in the March quarter (Q4FY20). And, things can only get worse before they improve in the long term.
Fourth quarter performance was affected by weak demand, relatively higher discounts, plus an adverse product mix with a lower proportion of diesel vehicles. Additionally, there was a transition to BS-VI to deal with, followed by the covid-19 outbreak and related blocks.
Analysts already knew that fourth-quarter sales were down 16% yoy (yoy). A major disappointment was the 1.3% drop in average vehicle performance.
A key factor dragging down performance after many quarters is that the company has halted production of diesel vehicles, which enjoyed higher performance. In addition, the BS-VI transition led to higher promotional expenses that added to the costs. Additionally, the vehicle discount also increased to Rs19,051 from Rs15,125 a year ago.
The result: the margin before interest, taxes, depreciation and amortization (ebitda) of 8.5% fell 200 basis points (bps) year-on-year and 120 bps less than the Bloomberg estimate. “Maruti’s margin performance was at its lowest point since Q3FY13 and was a significant negative surprise,” said a note from ICICI Direct Research.
Ebitda fell a strong 31.7% year-on-year to Rs1,546.4 crore. Again, this was much lower than the Bloomberg consensus of 18 analysts at Rs1,779 crore.
It is important to note that the company’s problems do not end here. Maruti, along with other original automotive equipment manufacturers (OEMs), opened the FY21 on a grim note with zero sales in April, following the crash led by covid-19.
“After a full national shutdown in April, we expect restrictions to be eased during May and June. Therefore, Q1FY21 would be a complete wash with ~ 73% annual decrease in volumes, “said Mitul Shah, vice president of research at Reliance Securities Ltd.
This is not everything. Industry experts are concerned about a quick restart of production. Although covid-19 may boost passenger car sales, given the fear among travelers of using public transportation, affordability due to wage cuts and job losses is questionable. Additionally, it will take a few quarters to streamline the supply chain and network of disrupted distributors, some of which are on the verge of bankruptcy after the virus pandemic.
For companies like Maruti, high export growth is unlikely given the drop in demand in foreign markets as well.
Therefore, it is not surprising that analysts are factoring flat earnings in fiscal 21 at best. Maruti’s actions yielded gains made in the past two days after news that production had resumed at one of its facilities. Despite this, at Rs 5,000, the stock is trading at around 30 times the estimated earnings for fiscal year 2011 which limits short-term benefits. However, its valuable valuations are underpinned by its market leadership, strong kinship, and cash flows that could withstand any storm.
.
[ad_2]
