Maruti hurt by one-off factors

Maruti hurt by one-off factors
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First Published: Fri, Apr 25 2008. 12 22 AM IST

Updated: Fri, Apr 25 2008. 12 22 AM IST
Maruti Suzuki India Ltd had a surprise in store for investors when it announced a change in depreciation policy that shaved off about one-third of its quarterly profit.
The company has concluded that with technology changing at a fast pace, product life cycles have become shorter and, hence, the useful life of its plant and machinery will be lower than anticipated. The upshot: a 58% jump in the company’s depreciation for the year ended March.
Since the decision on the policy change was taken last quarter, the additional depreciation for the whole year is bunched up in the March quarter results, leading to a sharp 34% drop in net profit. Higher depreciation from here on will lead to a lowering of earnings forecasts by analysts.
But more importantly, cash flow estimates won’t change because of this and hence estimates of the company’s valuation shouldn’t alter. One could argue that the change in depreciation policy would imply that capital expenditure would now be higher than anticipated, and hence cash flow would be impacted. But, note that the company had stated last month that it would spend an additional Rs9,000 crore in capex on research and development and for building its distribution capability. Its impact on cash flow has already been factored in by the markets.
It was not only higher depreciation that impacted profit growth last quarter. Operating profit fell by 13.5% to Rs476.6 crore, partly because of some one-time expenses. After the cut in excise duty in this year’s Budget, Maruti dealers were left with the stock they had purchased from the company at the higher rate of excise. The company compensated these dealers entirely, costing it Rs54.5 crore. Besides, the results included a mark-to-market loss of Rs50.5 crore on a forward cover as well on foreign-currency-denominated loan. Adjusted for these, operating profit rose by 5.5% on a year-on-year basis.
But as a percentage of sales, profit fell marginally on a year-on-year basis and by more than 100 basis points compared with the preceding December quarter. That’s because of a higher outgo on royalty and due to a jump in power and fuel costs. An increasing proportion of Maruti’s production is at its Manesar plant, which runs on diesel and is much more expensive than its other plant which runs on gas. To make things worse, fuel costs have risen sharply.
The company has discontinued production of the ‘Esteem’ model, on which it didn’t pay royalty, while royalty is payable on all new product launches. Due to this product mix change, the spend on royalty has increased. Soon, the company would be giving its steel suppliers hefty price increases, which will further impact operating margin.
But much of this seems to be reflected in Maruti’s share price, which is trading about 40% lower compared with its 52-week high, and at a trailing price-earnings multiple of 12.5. So, although March quarter results were below estimates, the downside may be limited.
Growth slows at HDFC Bank
With good results from other new private sector banks such as Yes Bank Ltd and Axis Bank Ltd, HDFC Bank Ltd’s results were expected to be good and it didn’t disappoint investors. Net profit growth in the fourth quarter has been 37.1%, well above the average growth of around 30% that the bank has churned out every quarter, come rain or shine.
But HDFC Bank cannot remain immune to economy-wide trends. Growth in advances has slowed to 35.1% year-on-year, compared with 48.7% at the end of December. Growth in net interest income is a very healthy 55.7%, but that’s lower than the third quarter’s 65.6%. Growth in non-interest income has been 39.3%, compared with 81.9% the previous quarter. Growth in fees and commissions has slowed a bit, but profit on sale of investments has come down dramatically compared with the December quarter.
The upshot: a slowdown in growth in pre-provisions profits from 67.5% in the third quarter to 42.3% in the fourth quarter. Provisions for bad debts were lower, which is why the difference in the 37.1% growth in net profits in the fourth quarter and the 45.2% rise in net profits in the previous period is not as stark as at the pre-provision profit level. Nevertheless, it’s worth underlining that this deceleration was expected and the market reacted to the results by pushing up the stock just a tad.
Net interest margin has improved a bit to 4.4% and the bank’s low-cost current and savings bank accounts constituted a very high 54.5% of total deposits, compared with 50.9% at the end of December. Portfolio quality has remained at more or less the same level.
Looking ahead, HDFC Bank’s growth drivers will come from its branch expansion programme as well as the integration of Centurion Bank of Punjab. The bank has proved that it’s able to weather a slowdown in growth, amply justifying its premium valuations.
Oriental Bank of Commerce: going cheap
The Oriental Bank of Commerce stock moved up 4.5% on Thursday, but it still trades at less than its book value of Rs226.15 per share on 31 March. The management has been eager to correct the undervaluation and put the legacy of the merger with Global Trust behind it, which is why it has chosen to write-off the remaining acquisition losses at one shot in the fourth quarter.
But the bank’s performance in its fourth quarter has been nothing to write home about.
Net interest income is lower by 2.1% compared with the year-ago period and although non-interest income has increased by 11.7%, operating profit before tax and contingencies, at Rs325 crore, is absolutely flat.
However, profit before tax has been boosted by a write back of provisions of Rs100 crore. This dipping into provisions has resulted in net non-performing assets as a percentage of net advances rising to 0.99% from 0.67% at the end of December.
The management says that it will be able to reduce cost of funds by paying back bulk deposits over the next few quarters. But interest expended as a percentage of interest earned was a high 77% in the fourth quarter. The only thing going for Oriental Bank is that it’s available cheap.
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First Published: Fri, Apr 25 2008. 12 22 AM IST