Buyout impact, margin worries likely to cap gains for Maruti Suzuki

The stock of the country’s largest passenger vehicle maker, Maruti Suzuki India (MSIL) was down 1.06 per cent in trade on margin pressures in Q1FY24, mixed market share outlook, and earnings impact due to the buyout of Suzuki Motor Gujarat.

While MSIL has decided to terminate the contract manufacturing agreement and acquire Suzuki Motor Gujarat, the quantum of payment and mode (cash/equity swap) has not been decided.

If the cash option is opted for, there would be a 3.5-4 per cent hit to MSIL’s FY25 earnings per share as the deal is expected to be completed by the end of the current financial year.

Brokerages believe that a cash payout is a better option for shareholders compared to an equity swap.

“Considering Maruti’s large cash position, we feel a cash payout will be useful while the share swap may involve 5 per cent equity dilution.

“The acquisition should help improve the return on capital employed ratio of the company as treasury investment yields are lower,” Pramod Amthe of Incred Equities, said.

Among other triggers for the stock are the volume outlook and the company’s ability to improve margins.

Brokerages have mixed views on the outlook.

Some research firms say that the company’s volume and market share could see an uptick given the recent launches (Jimny, Fronx, Invicto) and healthy order book.

The company is expected to outperform the passenger vehicle industry, which is expected to grow in the 5-7 band in FY24.

“After two consecutive years of market share loss, we believe that MSIL is at the cusp of market share recovery led by new launches,” Vivek Kumar and Ronak Mehta of JM Financial Research, said.

Other firms, however, believe that gains on the SUV front will be negated by other factors.

Kotak Institutional Equities expects the company to maintain its market share at 42 per cent over FY2024-25 owing to increased competitive intensity in the sports utility vehicle and compressed natural gas segments by competitors, whereas MSIL has no launches in the pipeline.

Analysts feel that the gains in SUVs may be offset by slowing demand for small cars.

This has played out in the July numbers as the 166 per cent gain in utility vehicles was offset by the 27 per cent decline in passenger car sales.

On the margin front, reported margins at 9.2 per cent in the June quarter was 130 basis points lower sequentially on account of one-time retention bonuses and higher other expenses which had an 80 basis points impact.

Even adjusted for this, margins at 10 per cent missed street estimates.

Nomura Research has lowered its operating profit margin expectations by 70 basis points in FY24 arguing that higher inventory, slowing growth and rise in advertising and promotion could offset operating leverage and commodity benefits.

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