True, Maruti Suzuki India Ltd missed the Street’s December quarter estimates on net profit that came in 10% lower than Bloomberg’s average estimate. But this is unlikely to impact valuations because the drop in net profit was due to the adverse mark-to-market impact on investments held and a higher-than-expected tax outflow.

Set this aside and the company’s operating performance was bang in line with estimates, leaving little to be desired by the investor. The 22% year-on-year growth in operating profit at Rs3,037.8 crore is commendable, considering its large base and the highly competitive domestic market scenario for passenger vehicles.

Maruti Suzuki sold 11% more vehicles when compared to the previous-year period and its realization too rose by 3%.

The car maker that today rolls out one out of every two passenger cars sold in the country grew its market share from 38% to 50% in the last five years mainly through new launches that filled gaps in the passenger vehicle segment. Cashing in on steadily rising demand, Maruti Suzuki’s average discount per vehicle too has steadily fallen as the share of new launches in its kitty increased.

Analysts say that the share of new launches has risen from 32% in fiscal year 2017 (FY17) to 40% at the beginning of calendar year 2018. Besides, the rate of success of new launches too has been relatively higher than that of the competition, which perhaps supports higher realization.

Hence, even on a higher base, the company clocked an 11% growth in sales and 3% higher realization when compared to a year back.

However, operating profitability got a leg-up from lower promotion expenses and forex benefits that helped to partially offset rising commodity prices. Operating margin jumped by 100 basis points to 16%. A basis point is 0.01%.

The company’s ability to sustain profit margins that trickle down into higher earnings is important to sustain its premium valuations in the auto universe. After the strong rally on the back of good results in the September quarter, the Maruti Suzuki stock returned 60% in 52 weeks, double that of the Sensex. However, after touching the Rs10,000-mark a few weeks ago, the stock has been steadily sliding down. Even at Rs9,277, it trades at a rich 25 times the estimated earnings per share for FY19.

Right now, concerns on the Street are not to do with Maruti Suzuki’s ability to sell its vehicles, but the capacity constraints in the near term that may subdue sales growth. So far, the company’s strategy to improve its product mix has helped offset capacity constraints and retain its profit margins. That said, according to a report by Kotak Securities Ltd, the car maker’s operating margin is hovering around historical highs (since FY05). Its return on equity and return on capital employed are the highest in a decade.

Will these improve further from the current levels? The carrot that dangles before analysts now is the reduction in royalty paid to its Japanese parent on new models launched in the future. This could be the next trigger for margin expansion, even as the gradual capacity expansion brings in the benefits of operating leverage.

Although it’s hard to fix a time horizon when these factors would result in margin gains, they are certainly key for the next round of rerating in the stock.

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