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Mark to Market | Maruti resilient amid adversities

Festive season sales and a huge waiting list of 125,000 vehicles for its diesel cars indicate the firm’s brand equity, reach
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First Published: Tue, Oct 30 2012. 08 09 PM IST
Average realization per vehicle was 16% higher than a year ago, driven largely by the sales of Maruti Suzuki’s new diesel vehicle Ertiga, along with Swift and Dzire. Photo: Ramesh Pathania/Mint
Average realization per vehicle was 16% higher than a year ago, driven largely by the sales of Maruti Suzuki’s new diesel vehicle Ertiga, along with Swift and Dzire. Photo: Ramesh Pathania/Mint
Updated: Wed, Oct 31 2012. 12 25 AM IST
Maruti Suzuki India Ltd’s performance proved its resilience amid tough internal and external conditions. In spite of over a month’s production loss following labour unrest and sluggish demand for cars, the firm’s net revenue at Rs.8,305.4 crore was 8.2% higher than a year ago and higher than Bloomberg consensus estimates. The 8.7% fall in volume was offset by better product mix and higher realization, in both domestic and exports.
Average realization per vehicle was 16% higher than a year ago, driven largely by the sales of its new diesel vehicle Ertiga, along with Swift and Dzire. Fortunately, the product, which is wheeled out of Gurgaon, was not affected by the lock-out at Manesar.
Maruti also gained as the royalty paid to its Japanese partner was lower at 5.4% of sales, against the 5.9% earlier on account of favourable exchange rates. In the analysts’ conference call, the management said it could not gain from falling raw material costs due to currency volatility.
Maruti recently concluded a 50% wage revision. However, most analysts reckon that this will hardly affect profitability as it ramps up volume in the ensuing quarters. Reported operating margin for the quarter at 6.1% was a tad better than a year ago. However, adjusting for one-time expenses (on account of forex losses marked to market) in the year-ago quarter, the operating margin was around 60 basis points lower. Profitability also took a beating as discounts offered in the quarter were higher than both the year ago period and the preceding quarter. One basis point is one-hundredth of a percentage point.
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Given these factors—lower volume, sluggish demand and higher discounts—Maruti’s profit before tax was 16.4% lower than a year ago at Rs.279.8 crore, after adjusting for gains and losses from foreign exchange volatility.
Yet the stock price rallied, outperforming benchmark indices since its strong September sales improved the outlook for the second half of fiscal 2013. Festive season sales and a huge waiting list of 125,000 vehicles for its diesel cars indicate its brand equity and reach. As the country’s largest car maker, it is the only one which has around 27% of its sales accruing from the rural areas, beyond the top 150 cities.
The only concern at this juncture is whether the firm, like its peers, will have to continue offering discounts on petrol vehicles, which could eat into profit margins. However, according to Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd, “as volumes improve going forward and the product mix skews in favour of diesel vehicles, the second half of fiscal 2013 could bring in a little over two-thirds the full year’s profits.” That said, the current market price of Rs.1,394.6 implies fair valuation of 15 times fiscal 2014 earnings, until there’s an uptick in demand.
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First Published: Tue, Oct 30 2012. 08 09 PM IST
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