India’s automobile company Maruti Suzuki Ltd reported a 57.5% drop in earnings before interest, tax, depreciation and amortization (Ebitda) to Rs296.8 crore for the quarter ended December. Still, the company’s stock was the best performer among Nifty companies, rising by 4.6% on a day when the markets fell by about 1%. Why did that happen? Were the markets expecting even worse numbers?
Analysts polled by Bloomberg had estimated an Ebitda of Rs357.5 crore, 20% higher than the reported profit. One view is that analysts’ estimates don’t include a one-time expense of Rs55 crore, which the company bore last quarter to compensate dealers after the change in excise duty in December. While analysts knew the company would take a hit of about Rs60 crore, this may not have been reflected in their estimates since it was a one-time charge.
Adjusted for this, Maruti’s operating profit would stand at Rs352 crore, more or less in line with estimates. The adjusted pre-tax profit of Rs347.5 crore, too, was nearly in line with the Rs352.4 crore profit. But even if Maruti has been able to meet beaten-down expectations, is that a valid reason for the stock to rise by nearly 5%? According to a dealer, considerable short positions had been built in anticipation of weak results and these positions were being reversed.
Well, the numbers may not be as bad as some punters may have expected, but are weak nonetheless. Excluding other income, pre-tax profit fell by as much as 71.6% even after adding back the one-time dealer compensation. In fact, other income accounted for as much as 51% of adjusted profit, compared with just 12.5% in the year ago period. Even on a quarter-on-quarter basis, things have deteriorated. The company made an operating profit of only about Rs20,300 on each vehicle sold last quarter, compared with Rs34,650 in the year-ago period and Rs27,200 in the September quarter.
The economies of scale the company had benefited from in the past years thanks to higher volumes are now being lost gradually due to a drop in sales.
The outlook for sales is grim due to the slowdown and the precariousness of the job market. Keeping this in mind, and seeing what lower volumes can do to the company’s profit, Maruti’s valuation of 12 times trailing earnings may need to be adjusted downward.