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    Why buy Maruti shares despite falling sales?

    Publish Date: October 17, 2018

    Maruti has seen sales slow down in the period July to September 2018. Sales are expected to be slower the rest of the year due to floods in Kerala, high fuel prices, and increased interest rates on loans. Maruti grew at more than 10% last year and was expected to grow in the same range. Maruti had little room beyond 10% as it was producing cars mainly to meet domestic demand. As sales in India slow, Maruti has the option of manufacturing for the export market and make up for slower sales in India.

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    How it could affect profits in the next few months

    Many parts are made under license from its Japanese parent and others are imported. Maruti has to pay in foreign currency for these. A drop in the rupee means paying in foreign currency is costlier. For example, a bill worth $1 would earlier cost Rs 60. Today, it costs nearly Rs 75. This rise in cost could affect profits unless the company raises prices.
    Slower sales are also reducing gross earnings, which can affect the profits. Another factor in play is the use of discounts to help overcome the slowdown in sales. 

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    Yet, Maruti’s long-term prospects seem bright. Here’s why:

    As the economy keeps growing, more people in India will be buying cars. 2020 is expected to be a good year with increased sales.

    A good range of models, catering to most car buyers in India means Maruti could continue to retain a strong presence in the market and dominate in market share.

    A good monsoon could also help with strong rural demand, helping to compensate for slower sales from cities. Rural sales now contribute nearly one-third the sales of cars.

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    Other factors:

    Buyers are moving to cars with petrol engines and Maruti has an advantage with a large number of petrol options for its car models. People also want more features and functionality in their cars, even first time buyers. This is helping Maruti gain with increased average price per car sold and this also is helping boost both sales and profits margins to some extent.

    Related read: Our analysis and valuation on Maruti


    A few words of caution:

    Investors should also note that among the risks and concerns highlighted by us are any major revision in licensing terms of foreign brands, lower export incentives, and raw material or forex volatility.

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