Update on Indian Equity Market:
On Thursday, NIFTY ended at 17,234 (+0.9%) as it closed near its high at 17,243. Among the sectoral indices, OIL & GAS (+0.8%), CONSUMER DURABLES (+0.6%), and FMCG (+0.6%) ended higher, whereas PSU BANK (-0.5%) and AUTO (-0.2%) ended lower. Among the stocks SHREECEM (+6.0%), HDFCLIFE (+5.8%), and CIPLA (+3.5%) led the gainers while M&M (-1.9%), ONGC (-0.9%), and BAJAJ-AUTO (-0.9%) led the losers.
Excerpts of an interview with Mr. Shashank Shrivastava, Executive Director of Maruti Suzuki (MARUTI) with CNBC TV18 on 31st August 2021:
- MARUTI is looking to cut production in September due to a shortage of semiconductors. The auto manufacturer is also getting ready for a substantial price hike in the upcoming month and this will be the fourth one since January due to a sharp rise in commodity costs.
- Commodity prices started going up from April-20 and they impacted MARUTI’s material cost, which is 75 percent of the total cost of manufacturing. The increase in prices of commodities like steel and copper was close to 50% and precious metals like Rhodium had a price hike of 257%.
- Since they were already coming out of a bad year (FY20) which was 18% less than FY19 and Covid-19 had badly affected 1QFY21, they did not wish to compromise demand and hence there was no price hike.
- However, they did increase prices in January by 1.4% in the hopes of some softening in commodity prices which did not pan out as expected. This made them deploy an additional price hike of 3.4% in April and another hike of 0.3% in CNG vehicles in August.
- Shrivastava confirmed that the upcoming price rise would be substantial and it would be deployed across all models produced by MARUTI.
- He did not reveal any production numbers for September since that depends on how the shortage situation pans out for their semi-conductor vendors.
- The number of electronic components varies from product to product and model to model within MARUTI’s large portfolio and for the past few months, they have been trying to adjust production to maintain high levels of production.
Asset Multiplier Comments
- Semiconductors are silicon chips that cater to control and memory functions. The shortage of such a crucial component has been impacting the automotive industry globally along with other industries, forcing them to cut down on production.
- MARUTI reported a decline of 20% in sales in August, as compared to July 2021.
- Owing to a supply constraint of electronic components due to the semiconductor shortage situation, MARUTI expects a decline of 60% in vehicle production in the month of September in Haryana and Gujarat. As certain fixed costs are to be incurred, margins could be affected in the short term.
- With the festivities coming up, there could be a rise in demand for vehicles and how MARUTI is able to match this festive buying with its supply remains to be seen.
- MARUTI is in no rush to join the electric vehicle bandwagon until they make it feasible for customers in terms of affordability.
Consensus Estimate: (Source: market screener and investing.com websites)
- The closing price of MARUTI was ₹ 6,780/- as of 02-Sept-2021. It traded at 40x/27x/21x the consensus EPS estimate of ₹ 188/280/354 for FY22E/FY23E/FY24E respectively.
- The consensus target price of ₹ 7,560/- implies a PE multiple of 21x on FY24E EPS of ₹354/-
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