The Maruti Suzuki India Ltd stock fell 3.7% to ₹ 9,396.65 on Thursday, after the company declared its June quarter results. The marginal miss in profitability and a wide miss in net profit, when compared to Bloomberg’s analysts’ average forecast, did not go down well with the Street. However, the performance looks to be a temporary blip and is unlikely to impact the company’s long-term earnings trajectory.
Here are a few takeaways from the results:
First, the net profit of ₹ 1,975.30 crore that missed the forecast by 12% was dragged down by an adverse mark-to-market impact on invested surplus. The consequent 60% year-on-year drop in other income pulled down net profit. Given that this is notional and that it may change in the subsequent quarters, it is less material to valuations.
Second, the 14.9% Ebitda (earnings before interest, tax, depreciation and amortization) margin, which was slightly lower than the forecast of 15.3%, was a satisfactory 160 basis points higher than in the year-ago period. According to Bharat Gianani, an analyst at Sharekhan Ltd, “Lower discounting (year-on-year) and good operating leverage along with a low base pushed up Ebitda margin for the quarter."
Further, adverse currency movement and commodity prices during the quarter also hurt profit margins. The management in its conference call said that commodity prices have shown stability in the recent past. While it skirted the question on price hikes in the near term, analysts reckon that this is possible to protect margins.
After all, Maruti Suzuki India is on a strong wicket, as it has more than half the pie of the passenger vehicle market. Its diverse product mix and waiting period particularly in the petrol segment, in spite of recent capacity expansion, shows its leadership position. The June quarter’s average realization growth when compared to the year-ago period also proves its pricing power. Of course, the seasonality factor (monsoon period being a low sales one) led to higher discounts when compared to the March quarter. This could change with the onset of the festive season.
Third and most importantly, the management assured strong and sustained demand both in the rural and urban segments. Its 24% year-on-year increase in sales during the quarter, albeit on a low base, mirrors the same.
True, the rising fuel and interest costs have affected auto stocks. Still, Maruti Suzuki India’s shares enjoy a rich valuation of about 24 times the estimated FY20 earnings. If anything, peak valuations could cap upsides in the near term. Otherwise, given the competitive stress in two-wheelers and the new regulatory changes in medium and heavy commercial vehicles, the passenger vehicle segment looks to be a safer haven for those who wish to ride the auto uptrend.