After vaulting to a 52-week high of Rs.1,607, Maruti Suzuki India Ltd’s shares closed 4.15% higher at Rs.1,600.20 on Friday. That wasn’t surprising as the country’s largest car maker beat market expectations for the December quarter on all counts. The moot question is: How will performance pan out as the base effect wears off?
Maruti’s December quarter performance portrays benefits from price increases and better product mix. With the company selling nearly 26% more vehicles during the quarter, the 44.9% jump in net revenue from the year-ago period to Rs.11,200.3 crore reflects better realization—13% higher, driven by an increased proportion of diesel vehicle sales. Diesel vehicles are costlier than the equivalent petrol-driven models. Exports also rose 17.2% from the year before. But demand for diesel vehicles could cool off if the expected higher tax on them is introduced. The outlook for Maruti will then hinge on how petrol car sales pick up and drive realizations.
That said, the firm has displayed tight cost control, which gave an added kicker to profitability. Raw material costs and royalty expenses were lower as imports became favourable to the firm as the yen weakened against the rupee. Analysts say that cost control was commendable given that there was a hike in vendor compensation during the period. The quarter’s operating profit, which was ahead of Street estimates at Rs.891.3 crore, soared by 113.6% year-on-year (y-o-y).
Operating margin was 270 basis points (bps) higher than a year ago and 183 bps higher than the preceding quarter at 8%. One basis point is one-hundredth of a percentage point. According to Surjit Arora, analyst, Prabhudas Lilladher Pvt. Ltd, while the firm has hedged some of its direct imports for fiscal 2014, it could reap the benefit of un-hedged indirect imports with a favourable exchange rate. Hence, the Street expects the March quarter profit margin to improve.
From an investor perspective, the sweet spot was the 143.8% jump in net profit to Rs.501.3 crore, which was 25% higher than Bloomberg’s consensus estimates. Surely a strong comeback after a 18.7% and 63.6% y-o-y contraction in net sales and net profit, respectively, in the December 2011 quarter.
At the current market price of Rs.1,600, Maruti’s shares discount fiscal 2014 estimated earnings per share by around 15, which is a fair valuation under the present circumstances. Of course, while it may be an arduous task to repeat such stellar growth in net profit, the benefits from higher exports, a stable and favourable exchange rate and the improving macroeconomic parameters forecast better quarters ahead when compared with the past year.