Downgrade from Jefferies puts brakes on Maruti scrip

By: | Published: October 6, 2015 12:13 AM

Shares of Maruti Suzuki India, the country's largest car marker by volume, declined nearly 4% on Monday after US investment banking firm Jefferies...

Shares of Maruti Suzuki India, the country’s largest car marker by volume, declined nearly 4% on Monday after US investment banking firm Jefferies had downgraded the stock to “underperform”, citing high valuations, change in capital allocation plans and under-performance of the company’s latest offering, S-cross, in the domestic market.

The scrip closed at R4,415.45 on the BSE, down R164.40 or 3.59%.

More than 20.67 lakh shares changed hands on the BSE and the National Stock Exchange, more than four times the average daily volume of 4.8 lakh shares in the previous three months.

Jefferies noted that there has been lack of clarity about Maruti’s new arrangement with Suzuki for the new manufacturing plant in Gujarat. The investment bank also said Maruti may face capacity issues in FY17 as the new unit is expected to start production only in FY18.

“There is no systemic benefit to Suzuki setting up the plant instead of Maruti, and thus it is a zero sum game in which Suzuki holds the upper hand,” the Jefferies investor note, authored by senior equity analyst and head of India research Govindarajan Chellappa, said.

RC Bhargava, chairman of MSIL, said in a television interview that the arrangement was not a zero sum game but a win-win situation for both Maruti and Suzuki. “There is no reduction in our margins or profitability due to (the) Gujarat plant compared to what it would have been if the investments have been made by us,” Bhargava said in an interview to a TV channel.

The report also noted that the average size of cars has increased in the last few years. While MSIL is well positioned in small cars, it lacks strength in the large vehicle segment as the competition here is stiff with all global majors having relevant portfolios.

The board of directors of Maruti has already approved the contract with Suzuki Motors for the Gujarat manufacturing plant. The car major is now awaiting approval of minority shareholders and other regulatory nods.

The voting of minority shareholders is scheduled for October 27.

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