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Maruti Suzuki’s results likely to trigger earnings downgrade

Maruti Suzuki’s results likely to trigger earnings downgrade
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First Published: Mon, Oct 31 2011. 12 53 AM IST

A Maruti Swift and a WagonR are displayed at a dealership in New Delhi. Photo: Bloomberg.
A Maruti Swift and a WagonR are displayed at a dealership in New Delhi. Photo: Bloomberg.
Updated: Mon, Oct 31 2011. 12 53 AM IST
For the September quarter, Maruti Suzuki India Ltd reported a 59.8% year-on-year (y-o-y) drop in net profit to Rs 240.4 crore. Prolonged labour unrest had led to a production loss of 28,539 units during the quarter and a fall in revenue was expected.
A Maruti Swift and a WagonR are displayed at a dealership in New Delhi. Photo: Bloomberg.
Still, the net profit is a disappointing 42% below Bloomberg’s consensus estimates. It is also the worst ever quarterly profit performance posted since the company’s listing in 2003. The December 2008 quarter following the Lehman crisis saw close to a 54% y-o-y drop in net profit.
Will investors shrug off the dismal results, assuming this to be a one-off poor performance due to labour issues? Or will the stock get hammered? A clearer picture would perhaps emerge after the company’s analysts conference call on Monday.
On the face of it, another round of earnings downgrade for fiscal 2012 seems imminent. This is in spite of the 8-10% downward revision a month ago when brokerages released September quarter earnings previews.
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The problem is that even after adjusting for the production loss during the quarter, sales volume for the three months ended September would have been 10.5% lower from a year ago. The management may be confident that volumes will pick up in the current quarter as pent-up demand is met, but at this juncture, given the challenging market outlook, with high interest rates, competition and the end of the festive season, demand and sales may moderate.
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Further, aggressive production ramp-up is needed, given that net sales for the September quarter were 15.7% lower at Rs 7,537.5 crore. That said, the strong 100,000 bookings for its new Swift hatchback speaks of its brand equity.
“The 10% decline in sales volume for fiscal 2012 may be revisited (downwards), which along with a detrimental yen-rupee equation, could hurt profits,” says Abhishek Banerjee, senior analyst, Asian Markets Securities Pvt. Ltd.
Profitability, too, is at risk. Operating profit margin at 6.3% during the quarter was a sharp 420 basis points lower from a year ago. One basis point is one-hundredth of a percentage point. Lower operating leverage and the appreciation of the Japanese yen against the Indian rupee hurt margins. This may improve only slightly in the near term.
The unfavourable exchange rate led to an increase in raw material costs as a percentage of sales. Royalty expenses (reflected in other expenditure) at 6% of sales, too, were higher than 5.5% a year ago.
Given these adversities, the stock has fallen nearly 30% in the last 52 weeks. A streak of optimism about the company’s performance drove the stock up in the last one week. Its current market price of Rs 1,128 discounts the present fiscal 2012 consensus estimates by about 15 times.
But worse-than-expected results and a possible sharp earnings downgrade could lead to negative sentiment at the counter for at least another quarter.
PDF by Sandeep Bhatnagar/Mint
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First Published: Mon, Oct 31 2011. 12 53 AM IST