Maruti Suzuki India Ltd is cruising even as the signs of demonetisation fade in the rear-view mirror. In the December quarter, the country’s largest carmaker turned in a performance almost in sync with the Street’s forecast, barring a minor slip-up on the profitability front.
The company’s operating margin at 14.8% was a tad higher than a year ago but fell short of estimates by about 70 basis points. But profitability could bounce back soon. A basis point is 0.01%.
Normally, the December quarter is a seasonally weak one. Since the currency ban had affected sales growth, Maruti Suzuki offered higher discounts compared to the September quarter, to push sales growth.
Besides, raw material costs rose both in absolute terms and as a percentage of sales, when compared to the year-ago period. So did staff costs. Also, an adverse impact on the foreign exchange front was contrary to expectations.
Sales growth was helped by a battery of launches in the recent past, most of which have done well. The extra sales they added more than made up for the subdued sales growth in the lower-end vehicle segment. December sales were 3.5% higher and the realization per vehicle too was up by a strong 8.8%, in spite of the discounts to beat the currency ban. Maruti Suzuki’s net revenue was an impressive 12% higher at Rs16,865 crore, topping Bloomberg’s 27-broker average.
Although its 14% increase in operating profit was slightly short of forecast, it did not deter investor sentiment. The stock inched up higher at Rs5,797 after the results were out as investors liked what they saw. The 47.5% leap in reported net profit (adjusted for Ind-AS) was impressive given the odds faced during the quarter.
Importantly, with the currency ban behind it, Maruti Suzuki’s sales growth should gain traction in the coming quarters. Analysts expect currency movements to favour the company in the near-to-medium term. They also expect the effect of discounts to be lower due to higher contribution from newer models. These should come together to contribute to better profitability.
At the current price, Maruti Suzuki trades at a rich 23 times estimated earnings for fiscal year 2018. According to Nitesh Sharma, an analyst at PhillipCapital India Pvt. Ltd, “Maruti commands a rich valuation as it has a strong cycle of new launches that increase our confidence in sustained sales (volume) growth.”