Higher discounts, shrinking sale force analysts to trim Maruti Suzuki earning estimates

With consumer sentiment expected to remain subdued, analysts have trimmed earnings estimates of Maruti Suzuki for the next couple of years.

“We cut our MSIL earnings estimates by 5% over FY20-21 mainly driven by cut in our Ebitda margin forecast, factoring in higher discounts than earlier but maintaining our volume estimates,” analysts at Kotak Institutional Equities said.

India’s largest carmaker, with a market share of 51%, reported an operating profit margin of 9.8% in Q3FY19, the lowest in last five years. The Maruti Suzuki India (MSIL) stock fell over 8% on Friday and hit a 52-week low at `6,516.35.

The Maruti management said on the conference call post results it expects to grow volumes at a rate higher than that of the industry at 4.5% y-o-y in FY19. Analysts had pencilled in a double digit growth for Maruti Suzuki during the first quarter of FY19, when its volume grew 24% y-o-y.

“While enquiries remain high, conversion to sales has been getting affected,” analysts at Nomura said. The highest ever discounts, offered by Maruti, of an average `24,300 per vehicle to clear inventory in December, is seen as a major cause of decline in margins.

Besides, the increase in raw material costs by 370 basis points y-o-y, higher marketing and advertisement expenses and one-time employee settlement costs also hurt operating margins.

Post the September 2018 quarter results, analysts at Jefferies noted that margin pressures were likely to continue due to an adverse impact from foreign exchange transactions as the effect through vendors comes with a quarter lag. Given that competition is expected to intensify this year with a slew of launches by Tata Motors, Mahindra, Honda Cars and others, Maruti too will need to spend more on new launches. As such, the expenses on advertising and marketing could hit margins.

Experts believe more launches in 2018 could have helped the company grow its volumes. “We note that in FY19, Maruti Suzuki launches were limited and back-ended in 2H FY19,” analysts at Nomura said. Ertiga was launched in October 2018, while WagonR was launched in last week.

The nearly 600 basis points decline in the company’s margins led to analysts at Jefferies India title their report as, “Unexpected slowdowns are the worst”. Margin pressure led to a 36% y-o-y Ebitda at `1,931 crore.

As per analysts at Jefferies India, record high discounts to clear dealer inventory, commodity and forex cost pressures and weak economies of scale were key factors for drop in margins.

Several brokerages trimmed Ebidta (earnings before interest, taxes, depreciation, and amortisation) estimates and EPS (earnings per share) estimates by 8-12%. “We lower our Ebitda margin estimates by 70-110 bps for FY19-21F on higher discounts, adverse forex, leading to 9-16% cut in our Ebitda estimates,” analysts at Nomura said. “Thus, we cut our EPS by 6-14% for FY19-21F,” they added.

According to Edelweiss Securities, “Unlike in FY15-18, most of its models are now available without waiting period. Most of the product gaps have been plugged too. This is likely to pressurise margin, unless demand revives.”

However, analysts at Kotak Institutional Equities believe Ebidta margin will improve in FY20 led by lower raw material costs, operative leverage benefit due to higher volumes and lower discounts on new launches by the company.