Maruti Suzuki Q2: Sales outlook robust, sustaining margins a challenge
On Friday, Maruti Suzuki India Ltd’s stock hit a 52-week high of Rs8,242 before settling a tad lower. Since April, it has surged 35%, outperforming benchmark indices such as the BSE Sensex and the BSE Auto Index that rose by 12% and 13%, respectively.
What keeps the stock ticking is its performance beating investor expectations regularly, which then reinforces investor faith in its premium valuations—25% higher than its five-year long-term average.
The September quarter was no different for the firm that rolls out one in every two cars sold in the country. It posted robust sales, gained higher share in a competitive market, and surprised on profit margins, too, ticking all the boxes that matter to investors.
The highlight during the quarter was its 16.9% operating margin that whizzed past Bloomberg’s average of 18 analyst estimates by 230 basis points (bps), albeit a tad lower than the year-ago period. One basis point is equal to one-hundredth of a percentage point. Analysts’ lower margin expectation was natural, given the consistent rise in commodity prices. However, Maruti manoeuvred a beat in margins through better sales mix, lower discounts, thanks to the festive cheer, new models on the shelf and prudent cost management.
Incidentally, the average discount per vehicle at Rs15,200 was far lower than the year-ago period and the preceding June quarter.
Of course, profitability also got a leg up from the economies of scale on account of strong sales volume. This is in spite of negative operating leverage at the Gujarat plant. The 17.6% year-on-year (y-o-y) jump in sales and a 3.6% rise in net realization augured well for Maruti. Therefore, net revenue surged 21.8% y-o-y to Rs21,768.2 crore.
Be that as it may, the question is, will this heady operating margin sustain? Was robust sales growth only a function of pent-up demand from regulatory issues of goods and services tax (GST) and the festival demand? If so, will it taper off?
To be sure, Maruti as the market leader had mastered the game of selling cars. Even on its high base, the firm’s market share rose by 330 basis points (bps) from a year ago to 50.5% in the quarter under consideration. Even capacity constraints that restricted sales growth is now history, with the Gujarat facility comfortably ramping up. A report by HDFC Securities Ltd says that the momentum in market share growth will continue with support from rural economic recovery and new launches.
For now, Maruti is cruising along. The quarter’s net profit of Rs2,484 crore was about 12% higher than forecasts on the Street, although lower other income and higher tax rate stymied y-o-y growth to 3.3%.
The only let down in the near term may be on profit margins. Maruti’s management itself, in its September quarter results earnings call, clearly said that the substantial rise in commodity prices in the first half of FY18 will reflect on margins in the second half.
What might partially alleviate pressure on margins is higher sales and hike in vehicle prices. To some extent, the direction of commodity prices and exchange rate fluctuations, especially the Japanese yen, would also impact profitability.