Analysts Remain Bullish On Maruti Suzuki Despite Multiple Headwinds

Shares of Maruti Suzuki India Ltd. are trading below the most pessimistic forecast as a weaker rupee increased operating costs and higher crude oil prices threaten to hurt demand for India’s largest carmaker. Yet, many analysts tracking the automaker retain faith in it.

About 76 percent of the analysts surveyed by Bloomberg retain a ‘Buy’ rating on the maker of the Swift hatchback and Vitara Brezza compact SUV. At least three larger researchers—Macquarie, Axis Capital and Goldman Sachs—have a target in excess of Rs 11,000, or a potential upside of over 50 percent.

This is despite the automaker’s shares tumbling 25 percent year-to-date, faling below the lowest forecast of Rs 7,500, according to Bloomberg. A strong volume outlook, robust pipeline and the recent launches of car models, among others, are the reasons analysts are bullish on Maruti Suzuki.

Here’s What Analysts Have To Say:

Macquarie:

• Analyst Amit Mishra in a note maintains ‘Buy’ rating with target price of Rs 11,500 as the company has several moats, including its important sales and service network.
• Said Maruti Suzuki is the best play on the Indian auto growth story over addition to market share as well as its dealer network.

Axis Capital:

• Ashish Nigam, deputy head of research, maintains ‘Buy’ rating with target price of Rs 11,187 due to the company’s strong commentary on a conference call for the quarter ended June 2018.
• Strong volume outlook, robust pipeline, urban demand tailwinds and lower royalty.

Goldman Sachs:

• In a report, Pramod Kumar, an analyst, maintains ‘Buy’ rating with target price of Rs 11,041 with an EV/EBIT multiple of 21.8x.
• Said Maruti Suzuki is targeting growth over 10 percent compared with industry rate of 8-9 percent.
• New models, like the Ciaz Hybrid, will strengthen the brand.

Still, the automaker facies multiple headwinds ranging from rising crude oil prices and input costs to the depreciation in the rupee to discounts that it’s offering on many of its models.

Brent Prices On Uptick

Prices of Brent crude price are back to levels last seen in Dec. 2014 after touching a low of $41.48 per barrel in Jan. 2016. Since then, it has rallied over 110 percent to $86 per barrel.

Currency Woes

The Japanese yen has appreciated around 12 percent the rupee after the Indian unit slid against the U.S. dollar. According to Deutsche Bank, the earnings-per-share of Maruti drops 0.7 percent for every 1 percent increase in the yen against the rupee.

Waiting Period

The waiting period for key models like Swift, Swift Dzire and Baleno—which were over three months some time back—have reduced as dealers stocked inventory ahead of the festive season, according to a BloombergQuint dealer survey. Baleno, Dzire and Swift comprise over 40 percent of Maruti Suzuki’s volumes. However, those buying the Brezza need to endure a two-month wait.

Discounts

Maruti Suzuki is offering discounts of up to Rs 60,000 for entry-level models like the Wagon R and Alto, which is affecting realisations, according to a BloombergQuint survey. The benefits for mid-range cars like the Baleno, S Cross and Ignis are around Rs 35,000. No discounts are being offered for the Brezza.

Input Costs

Indian steel companies raised HRC steel prices by around Rs 1,000-1,500/tonne for Oct. 2018 anticipating improved demand in the domestic market due to the upcoming festive season and the rupee’s depreciation, according to a recent Deutsche Bank report. Globally, aluminium prices have surged 8 percent in the past week and are likely to move upward due to Norsk Hydro ASA—one of the biggest aluminium suppliers worldwide—shutting its Brazilian plant. Deutsche Bank estimates that a 10 percent increase in base metal prices could be offset by a product price hike of 1-1.5 percent.

Kerala Floods

The recent floods in Kerala dampened passenger vehicle demand, leading to a 40-day inventory pile up. Maruti Suzuki said in a statement that sales were adversely affected due to severe floods in Kerala and heavy rain in other parts of India.