Maruti Declines After Jefferies Cuts Stock Rating to Sell

  • Contract manufacturing deal with Suzuki seen without benefits
  • Parallel distribution network seen to bring associated costs

Maruti Suzuki India Ltd. fell the most in six weeks in Mumbai trading after Jefferies cut its rating on concern a focus on larger cars, outsourcing manufacturing and building a parallel distribution network bring associated risks.

Shares of Maruti declined 3.6 percent to 4,414.05 rupees, the most since Aug. 24. The stock was the worst performer on the benchmark S&P BSE Sensex, which rose 2.2 percent. Jefferies cut its rating on the stock to the equivalent of a sell from buy, and lowered the target price to 3,952 rupees.

Maruti said its board last week approved an agreement with a local unit of parent Suzuki Motor Corp. to source vehicles and parts from a new factory in Gujarat. India’s biggest carmaker by volume, which has built its brand selling cheap, fuel efficient cars, is setting up new showrooms to attract buyers seeking a more premium shopping experience for pricier cars.

“Manufacturing would be outsourced to Suzuki for no apparent systemic benefits
in our view, leaving it susceptible to transfer-pricing issues in the future even if not now,” Govindarajan Chellappa and Apurva Kumar, wrote in a note dated Oct. 5. “Maruti suffers from lack of brand associated with larger cars and will need to invest in pricing or otherwise. The attempt to set up a parallel distribution network is an effort to address this issue but has its own costs associated.”

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