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BS-VI may actually put Maruti in a fast lane: Mitul Shah

As 70-80% of Maruti portfolio BS-VI compliant, it will be comparatively protected

ET Now|
Updated: Nov 05, 2019, 04.31 PM IST
We will see revival probably in FY21 and a sizable ramp-up in inventory will be also seen in the first half of FY21, says Mitul Shah, VP-Research, Reliance Securities. Excerpts from an interview with ETNOW.

How are you analysing the commentary from Suzuki Motor on Maruti? How are you seeing the overall numbers after the festive season?
Parent company Suzuki has given profit warning and they have reduced their own guidance by 30% reason, the reason being that nearly 60% of the profitability depends on Maruti Suzuki. It is in terms of the two factors – royalty payment to Suzuki and profit contribution — because 56% of the holding company is with Suzuki. Herein, Maruti volume is down by 20% for the first half. Because of margin pressure due to higher discounts and competitive intensity, net profit is down by 35%.

So in line with this 34-35% decline in Maruti’s profit, the impact will definitely be felt directly in Suzuki’s profitability. We believe that during the second half, although there would be an improvement, but profitability on YoY basis would be much lower compared to last year. Again the impact will be on Suzuki, though quantum would be less than what the company reported in the first half.

So the inventories get adjusted in the system. Once the inventory of auto companies gets adjusted and absorbed, do you think the same quantum of demand will come in or will it remain muted?
Demand has recovered to greater extent in the festival season. The two reasons are festival cheers as well as various incentives and discounts offered by the companies. The NBFC schemes are also quite good this time, compared to past seven-eight months. The second major reason is that there was a pent-up demand of last seven to eight months.

People had postponed purchases till the festival time. That is why there is a single digit growth in demand during festival but going forward, it would be muted demand for the next few months. We have to note that the BS-VI transition is going to happen over the next three-four months and that is going to create another hurdle for the passenger vehicle industry, particularly for the diesel segment.

Maruti will remain relatively protected in this scenario because it has already launched its BS-VI product. Nearly 70% to 80% of the Maruti’s portfolio are already BS-VI compliant. So, for them, the transition would be much smoothers.

But due to transition, demand has already picked up during the last two months. Some slump will happen post festival, as is normal. In this situation, inventory fill-up will not be very rapid as compared to the usual situation though right now, inventory is much below the normal level, particularly for Maruti’s sizable inventory correction. Every company will monitor the BS-VI situation gradually and ramp up inventory for the next two quarters. We will probably see revival in FY21 and a sizable rampup in the inventory build will be also seen in first half FY21.

Also Read

Maruti is a buy on dips: Mitul Shah, Reliance Securities

Reliance Sec’s Mitul Shah on why he is bullish on Maruti Suzuki

A tech tieup could help Tatas to cut costs: Mitul Shah, Reliance Securities

Don’t expect recovery in auto sector before mid FY20: Mitul Shah, Reliance Securities

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