CLSA downgrades Maruti Suzuki to ‘sell’; rising competition, slowdown weighs

NEW DELHI: CLSA in its latest report downgraded Maruti Suzuki Ltd to ‘sell’ from ‘underperform’ as the Asia Pacific-focused broker believes that any demand recovery in the passenger vehicle (PV) market might not be as large as was estimated, as industry growth has slowed to 5 per cent over FY12-13.

“Maruti specifically needs petrol car demand to improve given its diesel engine capacity constraints, which might not happen. Meanwhile, industry demand profile is changing and is moving towards segments where Maruti is less dominant,” CLSA said in a report.

In the past, the stock has rallied on hopes of a large demand revival, which is by no means a certainty. Citing the rising challenges for India’s top car maker, CLSA downgraded the stock but revised its target price upwards to Rs 1270 from Rs 1140 earlier.

Maruti Suzuki market share is highest in small cars and more specifically in petrol small cars and small cars priced under Rs400K. A careful analysis reveals that within small car segment, share of petrol cares is falling and share of lower-priced small cars (under-Rs 400k) is also falling.

Competition concerns are not over yet over for India’s top care maker; however the competition is likely to rise over FY14-15 once Hyundai and Honda launch their diesel cars.

“Maruti’s most popular models (Swift, DZire) coming under attack over FY14-15 once Hyundai and Honda set up their diesel engine plants in India and launch diesel variants of their car models,” CLSA added.

CLSA is of the view that Maruti should now trade below historical average multiples given lower earnings visibility and higher earnings volatility going forward than for most of its listed history.