Maruti Suzuki’s Q2 results top estimates to back its rich valuation

The operating margin of 17% was in the spotlight, expanding from the year earlier level by about 137 basis points, beating estimates


Graphic: Vipul Mishra/Mint
Graphic: Vipul Mishra/Mint

Maruti Suzuki India Ltd’s stellar September quarter performance left little more to be desired by investors. Net revenue surged by 28.8%, which was in line with what analysts had pencilled in.

The operating margin of 17% was in the spotlight, expanding from the year earlier level by about 137 basis points, beating estimates. A basis point is 0.01%. In spite of adverse currency movement, factors that aided profitability were higher sales volume and the resulting capacity utilization, a right product-mix with higher-end vehicles that pushed up realizations, cost-cutting and lower discounts.

But the management categorically said margins would fall in the forthcoming quarters. Commodity prices are no longer going to be subdued. Raw material costs as a percentage of sales was also higher during the quarter. Further, there is some ambiguity on cost structures between Suzuki Motor Corp. and Maruti Suzuki India, after the latter begins producing cars from its new Gujarat plant, which is a couple of quarters away.

Perhaps that’s why the stock was listless on Thursday. Besides, the stock had already surged by about 30% in the past one year, while the BSE Sensex has been hovering around the same level.

That said, the quarter had some other surprises too. The 35% jump in operating profit was far greater than anticipated. However, higher other income when compared to the year-ago period and a lower-than-expected depreciation (due to revaluation of useful life of assets) gave a leg- up to net profit. The figure of Rs2,398 crore was 60% higher than a year back and 36% above what analysts had forecast. But this heady increase could be a one-off, as “other income” could vary.

At its current price of Rs5,859.75, the Maruti Suzuki India stock is trading at about 23 times (close to peak valuation) estimated one-year forward earnings per share. Still, it’s the best play on the country’s retail auto sector that is now on an uptrend. What may drive the stock higher in the near term is robust sales, given the waiting period for new products in its portfolio. The Street would also watch for cues on long-term profitability, especially once the new plant goes on stream.

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