Sunday, October 16, 2011

Maruti - Avoid

Shares of Maruti Suzuki Ltd slipped to their 52-week low of Rs 1022.10 on Friday as investors are concerned of ongoing strikes at various plants which may weigh on production targets and profitability.

Maruti Suzuki has suspended production at its factory in Gurgoan for two days from Friday in view of the strike at its component supplying plant in Manesar.

Workers at Maruti Suzuki's Manesar plant went on strike demanding reinstatement of 44 suspended co-workers who were not taken back after an earlier 33-day impasse with the management ended Oct 1.

Goldman Sachs in a recent report has cut production estimates for Maruti Suzuki Ltd and maintained a 'Neutral' rating with a 12-month price target of Rs 1071, a cut from Rs 1173 target earlier.   The brokerage report says, "Owing to persistent labour strikes at Maruti Suzuki's Manesar plant and supplier Suzuki Power Train, we cut our volume estimates for Maruti Suzuki to 1.2mn units for FY12E (from 1.35mn) with further potential downside should the current impasse continues."

Also, the company might not be in a position to take advantage of new capacity at the Manesar plant in the face of demand uptick driven by seasonally strong festive demand, launch of new Swift model in Aug'11.

According to a report, continued labour unrest at Maruti Suzuki Ltd has alarmed auto companies, as both the carmaker giant and vendors have reported a combined loss of around Rs 3,000 crore since the start of the standoff earlier in June this year.   The government has suffered an excise revenue loss to the tune of Rs 350 cr, while the company has already taken a hit of over Rs 1500 crores.

According to estimates, since the first round of strike in June this year to over 30 days-long standoff from August 29-October 1, and the fresh strike at the Manesar plant from October 7, Maruti Suzuki has suffered a total production loss of over 51,000 units.

Any worsening in labour disputes could potentially drive structural downside risk to Maruti Suzuki's margins from higher staff costs in the long run.  Maruti Suzuki's current staff cost as a percentage of revenue is one of the lowest among peers in India and Asia.

The strike could not come at a more crucial time for the car manufacturer as it is the festive season, which typically generates huge demand -- something the automobile giant is in need of given the sluggish sales witnessed in recent months.

According to recent data, domestic passenger car sales declined for the third consecutive month in September with a fall of 1.8%, mainly due to the severe impact of labour issues on Maruti Suzuki India's production.

According to figures released by the Society of Indian Automobile Manufacturers (SIAM) today, domestic passenger car sales stood 1,65,925 units in September against 1,68,959 units in the same month last year.

Maruti Suzuki Ltd might not be able to take advantage of the festive season, which typically generates huge demand for automakers, on the back of ongoing strike at Maruti's plant which has halted production.

In September, the company's sales declined by 17.76% to 66,667 units from 81,060 units in the same month last year, while rival Tata Motors reported a 2.19% jump in sales to 21,011 units in September this year from 20,560 units in the same period last year.

Car sales in India are expected to rise just 2 to 4 percent this fiscal year to next March, down from an earlier forecast of 10 to 12 percent, industry body Society of Indian Automobile Manufacturers (SIAM) said earlier in the week.

Analyst Call:

Shares of Maruti Suzuki closed 2.65% lower at Rs 1028.45. The stock has touched its 52-week low of Rs 1022.10 earlier in trade today.

"Today the stock has made a new 52 week low, and is inching towards breaking the 1,000 mark on the downside," said Kunal Bothra, Senior Technical Analyst, Manager Advisory, LKP Securities.

The stock has plunged over 15% since June 2011 and over 27% so far this year.

"Technically, the stock has broken down out of a one month consolidation, and if it sustains below Rs 1050 on closing basis today, we should see more selling pressure in this stock," added Kunal.

"If we look at the weekly chart of Maruti Suzuki Ltd, it is clear that the stock is in a consolidation mode since Sep 2009 peak. However if it manages to hold its key retracement levels (61.8%) of Rs 896, on a longer term (2 or more years) basis, the uptrend would still remain intact," said Kunal.

CLSA also maintains "underperform' rating on Maruti Suzuki Ltd with a target price of Rs 1075, a cut from Rs 1210.

Our Recommendation

We expect the share to slide further 25% in the upcoming months due toe the following

- loss of market share
- sedate car market Oct-Dec will be worst
- Continuing labour unrest
- launch of new models by rivals

Below 1000 mark the stock could sink to 800 levels by end december.  Long term investors can enter the stock post Jan 2012 and hold for a period 2-3 years for a 100% gain by way of capital appreciation.

Ingenious Investor
Equity Research Division

Ravina Consulting
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3rd Cross Kamanahalli

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