Maruti Suzuki, whose stocks have hitherto been enjoying price-to-earnings multiple higher than its historical average, might be forced to downgrade its operating margin estimate for the first time as its December quarter numbers failed to live up to expectations. The reason for that can be broadly attributed to two rising concerns for the carmaker.
The first concern is that the benefit from soft material prices is lessening sooner than manufacturers had hoped. Maruti Suzuki's management did indicate back in the September quarter conference call that benefits from cheaper raw materials would diminish gradually, but raw material costs actually increased for every unit sold in the December quarter (compared to the previous three months).
The second is that Maruti Suzuki is being forced to shell out more and more discounts to attract buyers for its vehicles. While the company has delivered 16% volume growth in the December quarter surpassing the industry with a wide margin it was on the back of a 'demand-push' strategy during the festival season. A higher discount thus, lowered the average realisation per vehicle. Average discount per vehicle in the December quarter rose to Rs 21,000. Under the circumstances, few analysts believe that discount levels could fall.
Maruti Suzuki is expecting 16.1% and 16.4% operating margins for FY16 and FY17 respectively, according to analysts from Bloomberg.
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