Maruti Suzuki: A comfortable ride ahead?

An uptick in petrol vehicle sales will boost both operating leverage and profitability for Maruti
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First Published: Sun, Apr 28 2013. 03 24 PM IST
The next 12-24 months should see the country’s largest car maker on a fast track.Photo: Pradeep Gaur/Mint
The next 12-24 months should see the country’s largest car maker on a fast track.Photo: Pradeep Gaur/Mint
Updated: Sun, Apr 28 2013. 09 04 PM IST
Is Maruti Suzuki India Ltd’s stellar March quarter performance a harbinger of better days ahead? The company’s financial results beat the Street’s expectation on all counts. The stock surged by 5% on Friday notwithstanding the 20% rise seen since March. Now analysts seem to be quickly revising the earnings estimates for the current fiscal year upward by 5-8%.
The kicker was the better than expected operating margin of 10.4%, which was a huge 310 basis points (bps) higher than the year-ago period. The key reason was the 340 bps dip in raw material cost. The trend could continue for a few quarters ahead, as global commodity prices have come off from the peak levels. One basis point is one-hundredth of a percentage point.
Meanwhile, the relief from the favourable currency impact is likely to continue at least for a couple of quarters. The management in its post-earnings conference call said that it has hedged only 30% of its foreign exchange needs. Any depreciation in the Japanese yen would therefore boost margins as imports get cheaper. Note that about a quarter of Maruti’s net sales have an exposure to forex, 19% by way of direct and indirect imports and the rest by way of royalty paid to its parent, Suzuki Motor Corp. According to Emkay Global Financial Services Ltd, “even if 60% of the yen depreciation benefits are retained by company, it could lead to a +200 bps margin improvement for fiscal 2014 over the previous year.”
Of course, while Maruti’s sales volume was lower for the quarter, the favourable product mix with a higher proportion (about 42%) of diesel vehicles and relatively lower discounts doled out during the quarter, led to a 14% jump in average realization per vehicle sold. Net sales of the standalone entity were up by around 9.3% to Rs.12,814.4 crore. This, along with cost benefits, helped net profit to jump by 79.3% to Rs.1,147.5 crore, compared to a consensus estimate of Rs.715 crore. That said, a significant portion of the profits were from other income arising out of fixed maturity plans that matured during the quarter.
A plum in the pudding is the merger of its powertrain subsidiary—90% of the firm’s diesel engine supplies are captured by Maruti. Its operations enjoy better margins, which should augur well for Maruti in future. Including the merged entity, Maruti’s net revenue and profit jumped by 23% and 46%, respectively.
Given these tailwinds, the next 12-24 months should see the country’s largest car maker on a fast track. An uptick in petrol vehicle sales as the gap between diesel and petrol prices narrows will boost both operating leverage and profitability. Says Surjit Arora, analyst, Prabhudas Lilladher Pvt. Ltd, “Maruti is likely to report a 6.3% and 14% year-on-year volume growth in fiscal 2014 and 2015 respectively.” A culmination of all these factors might see a valuation expansion from a fair 15 times its one-year estimated earnings that the stock trades at now.
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First Published: Sun, Apr 28 2013. 03 24 PM IST
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