Maruti Suzuki’s earnings prospects hinge on sales momentum
With operating expenses reined in, the name of the game was sales volumes
Maruti Suzuki India Ltd put up a decent show in the June quarter, inline with expectations of the Street. With operating expenses reined in, the name of the game was sales volumes.
June quarter’s 11.1% growth in net revenue compared with a year back was driven by a 12.6% rise in the number of vehicles sold. While rural sales continued to grow at a steady pace of 26%, urban demand revival shored up total volumes. Interestingly, the share of diesel vehicles did not change compared with the preceding quarter—comprising a third of the volumes.
With volumes steadily stacking up, higher capacity utilization, cost-cutting and localization of production, Maruti’s operating profit grew by 13.9% to ₹ 1,328.2 crore. Employee and raw material costs as a percentage of sales were slightly higher than a year back. Despite that the firm clocked a 30 basis point improvement in operating margin to 11.7%, ticking off Bloomberg’s consensus estimates of around 32 brokers.
A basis point is a hundredth of a percentage point.
Again, although the net profit at ₹ 762.3 crore was 20.7% higher than the year-ago period, it did not surprise the Street. The stock, therefore, fell by 1.1% to ₹ 2,524.5. Note that the general sentiment on the Street was dull with benchmark indices closing lower after a rather volatile trading session.
Meanwhile, the management in an analysts’ conference call merely reiterated investor expectations that the current revenue growth rate is sustainable over the next few quarters. Surjit Arora, analyst at Prabhudas Lilladher Pvt. Ltd, expects a 14.4% compounded growth rate in sales volumes between 2013-14 and 2015-16, driven by latent demand after flattish sales for three years. New launches may also fuel sales in the coming quarters.
One blemish in the quarter’s performance was that the average discount per vehicle increased from ₹ 17,500 in the March quarter to ₹ 21,000 in June. According to a report by Emkay Global Financial Services Ltd, apart from sustained sales growth, lower discounts in the coming quarters will improve investor sentiment. Perhaps valuations could then inch up from the present 18 times estimated earnings for 2015-16.
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