On Wednesday, Investec has reduced its price target for Maruti Suzuki India Ltd (MSIL:IN) to INR 12,385 from INR 14,030, while continuing to recommend a Hold rating on the stock.
The revision follows the company's reported earnings before interest, taxes, depreciation, and amortization (EBITDA) of Rs 34.4 billion, which showed an 8% year-over-year decrease and was 1% lower than the previous quarter. The EBITDA figures fell short of both Investec's and the broader market's expectations by approximately 5% and 9%, respectively.
The shortfall in margins was attributed to an increase in sales promotion expenses, with the average discount per vehicle rising to 50 basis points in the second quarter, marking the highest level in 18 quarters.
Additionally, higher raw material costs contributed to a 20 basis points impact on margins during the same period. Despite management's anticipation of a 14% year-over-year retail volume growth for the festive season, the forecast for the fiscal year ending 2025 remains muted.
Maruti Suzuki's management has cited a stronger demand in rural areas compared to urban centers. However, the entry-level car segment continues to experience weakness, with a notable shift in consumer behavior favoring premium vehicles.
The company's volume performance from April to September 2024 has seen a 3% year-over-year decline, contrasting with competitor Mahindra & Mahindra's 21% growth over the same period.
Investec's cautionary stance is influenced by the soft outlook for the entry-level car market, which accounts for 4.0% of volumes, and the potential risks associated with the transition to electric vehicles (EVs).
The firm also notes Maruti Suzuki's dependence on Toyota (NYSE:TM) for technology as a point of concern. Despite these challenges, Investec maintains its Hold rating on the stock, expressing a preference for Mahindra & Mahindra over Maruti Suzuki.
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