Over the last 20 years, India experienced an unprecedented auto boom as part of the dramatic growth in the country’s economy; today, its automotive industry has become the seventh largest in the world and one of its fastest growing, second only to China. When the automotive boom began in the 1980s, Maruti Suzuki (MSIL IN) was one of a handful of car manufacturers in India and boasted a significant share of the growing market. But as the market has increased in size, it has also become more open to competition from global manufacturers such as Ford, GM and Renault, against which Maruti Suzuki now finds itself competing. Adding to that gloomy reality is the recent news of a slump in demand for new cars of all kinds in India, with October’s dip being the steepest recorded by the Society of Indian Automobile Manufacturers in more than a decade.
Not surprisingly, analysts already are bearish on Maruti’s stock ahead of the scheduled release of earnings for its fiscal year (ending March 31, 2012) on April 26, 2012. Currently, the I/B/E/S consensus estimate is that the company will report earnings of 67 Indian rupees per share, a figure that analysts have already cut from their previous consensus of 85 rupees per share in early September.
More downward revisions appear likely, our models suggest. The StarMine Analyst Revisions Model (ARM), which anticipates future revisions to the estimate, is at 4, putting Maruti in the bottom decile of companies in the region. Meanwhile, the StarMine SmartEstimate, which is significantly below the consensus, also warns that further cuts in analysts’ estimates are likely.
The SmartEstimate differentially weighs analyst estimates, ascribing a greater importance to the estimates by the best analysts as well as to those estimates published most recently. As can be see in the chart above, the SmartEstimate(blue line) – currently at 62.46 rupees – has remained below the I/B/E/S consensus (the gold line) on a consistent basis, with the consensus following the SmartEstimate lower. The current Predicted Surprise – the difference between the SmartEstimate and the consensus – is currently -6.8%. Such a sizeable negative Predicted Surprise is an indicator that the consensus likely will fall in the future. Indeed, one highly-regarded analyst already has a Bold Estimate of only 53.23 rupees for Maruti, well below the consensus. Bold Estimates of this kind are those issued by 5-star rated analysts that differ significantly from the mean estimates; whenever one of these top analysts sticks his or her neck out with a Bold Estimate, it may be worth re-evaluating the company and its prospects.
Analysts cite high intrest rates and a weak Diwali holiday season as reasons for lowering their earnings estimates for Maruti. Diwali, a Hindu holiday also known as “the festival of lights”, is a national holiday in India that takes place every year in late October or early November, and that is considered an auspicious time for families to make big ticket purchases. The fact that car sales were weak during this period may mean that Maruti will hit even more speed bumps along the road to the end of its fiscal year, and that analysts may respond by trimming earnings estimates still further.
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