Maruti Suzuki’s March quarter earnings miss won’t dent its valuations
For Maruti Suzuki, the cost pressures that dragged net profit down during the March quarter are mostly one-offs
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To be sure, Maruti Suzuki India Ltd’s March quarter results took some of the steam out of its stock. It closed 2% lower, as costs weighed on profits. While net revenues were higher on the back of skyrocketing sales that beat industry growth rates, net profit fell significantly short of Bloomberg estimates, with margins too being squeezed. It’s a disappointment for investors.
That said, here’s why the rich valuation of its stock that trades at 22 times the estimated earnings for FY2020, is unlikely to ebb in the near term:
The cost pressures that dragged net profit down during the March quarter are mostly one-offs. Adverse foreign exchange movements increased royalty payments to its parent, Suzuki Motor Corp. Being the last quarter of the year, changes in gratuity and variable pay led to higher employee costs, which expanded by 50 basis points as a percentage of sales, when compared to the year-ago period. Meanwhile, new launches and the annual Auto Expo led to higher advertising and marketing costs, while higher power and fuel costs too added to inflated expenses.
These expenses hurt the operating margin. At 14.2%, it was only a shade better than a year ago, but fell drastically short of Bloomberg’s forecast of 15.5%.
Add to this the huge jump in interest costs during the quarter, which too was a one-off expense towards dues paid to landowners of the Manesar plant as compensation, according to court orders. This was not all. The quarter also saw a higher tax outgo. That the net profit of Rs1,818 crore therefore missed analysts’ forecasts is not surprising.
Investors should realize that most of the cost pressures, barring that of rising raw material costs, are one-offs. Besides, there are positives that could back Maruti’s premium valuation on the Street. The management appears confident that the firm would continue to beat industry growth rates. Maruti has posted double-digit growth in sales volumes over the last four years.
Further, the firm’s strategic shift into higher-end vehicles in the last couple of years will lead to better realizations that could support margins. Its nimble-footed product launches have helped reduce the discounts offered. The average discount per vehicle of Rs13,880 during the March quarter was a huge cutback from earlier quarters, underscoring its brand equity amid stiff competition. Of course, the utility vehicle business that it has recently ventured into is likely to add to marketing costs.
Topping all this is the news that the company has revised the terms of royalty, where for all new models Maruti would pay its parent royalty in rupee terms and also be reimbursed with some margin for research and development work in India. This implies lower royalty in the quarters ahead and lower risk of foreign exchange fluctuations, which in turn would lower the risk to profit margins.
In other words, while the March quarter had several misses on profit and profit margins, it is unlikely to shake investor confidence in the stock.
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