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The dilemma of being a long term investor in Maruti Suzuki

Maruti has had several news flows in the last one week and they have not been too positive. How should investors react to the news, especially if you are long term investors? Here is what to know.

5 mins read   |   26 - Mar - 2022   |  
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written by Shashank Gupta

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CLSA downgrades Maruti

One of the top global brokerages, CLSA, has downgraded the target price of the company lower by 15-16% from current price levels. CLSA has cited two reasons for the same. Firstly, Maruti has been hit by rising input costs of commodities. It has resulted in pressure on margins. The second aspect of Maruti losing its market share is a tad more serious as it hints at tough competition in the auto market place. While Maruti still remains a dominant play, loss of share is telling. 

Why loss of market share?

The cost factor is endemic and no auto company has been able to escape the reality. That is less of a problem. The real concern is the gradual loss of its market share. That is happening due to 3 reasons. Firstly, the competition has become quite intense with a number of new launches in the market. Secondly, the shortage of chips had forced Maruti to shut down production at some of its plants due to supply disruption. That hit Maruti more than other players. Lastly, Maruti has been less than swift when it comes to the shift to EVs. It is here that other players have taken a lead, even as Maruti continues to be bearish on EVs. 

Conflict of interest issues

One issue that is less spoken about, but a major concern is conflict of interest in India between Maruti Suzuki and Suzuki Motors in Gujarat. The latter is a 100% subsidiary of Suzuki. In fact, when the plan to set up a plant under a separate company was mooted, proxy advisory firm IIAS had asked shareholders to vote against the proposal. However, the shareholders had then overwhelmingly voted in favor of the proposal. Today, that conflict of interest has come home to roost. Maruti Suzuki remains bearish on the prospects of EVs in India. At the same time, Suzuki Motors is investing Rs.10,400 crore in its Gujarat plant for the manufacture of EVs. IIAS has once again highlighted that this should have been done through Maruti, rather than through Suzuki Motors Gujarat. That is going to be the real conflict issue. 

What to do with Maruti stock?

There are no easy answers, but the big risk for Maruti shareholders lies in this conflict of interest. What happens to the shareholders of Maruti if most of the futuristic value accretion is going to now happen in Suzuki Motors Gujarat. Has the management of Maruti been too myopic by ignoring the EV trend? This is the big risk for which Maruti investors must seek clarity. Input costs are just an ephemeral issue and market share is an outcome. The future of Maruti will rely on how this conflict is handled.