Maruti rides on lower input costs, operating margin improves

Maruti rides on lower input costs, operating margin improves

For the third quarter of FY10, MarutiSuzuki India Ltd registered 62.2% year-on-year (y-o-y) growth in net sales to Rs7,502.9 crore and net profit of Rs687.5 crore, which was above our expectations.

The company reported a robust performance on the operating front owing to the substantial fall in raw material cost and improved operating leverage, due to which the company recorded a 15.1% jump in operating profit margin (OPM). We believe that Maruti’s valuation would be largely determined by its ability to maintain market share amid intensifying competition.

For the December quarter, Maruti reported turnover of Rs7,502.9 crore, up 62.2% y-o-y, which came primarily on the back of a robust 48.7% y-o-y increase in volume and 10.3% y-o-y jump in average realizations. OPM stood at 15.1% owing to the 379 basis points contraction in raw material costs, which accounted for 73.1% of net sales, and overall achieving optimum operating leverage. Maruti recorded net profit of Rs687.5 crore, which also exceeded our expectation.

The sales performance came on the back of a robust 48.7% y-o-y increase in volumes, while average net realization per vehicle moved up 10.3% y-o-y, which was marginally lower on a quarter-on-quarter basis primarily due to the change in sales mix.

During the quarter, Maruti registered strong volume growth both in the domestic as well as export markets. The company posted total sales volume of 258,026 units during the quarter, up 48.7%. This included exceptional growth in exports of a record 39,116 units, a y-o-y growth of 167.3%. Robust sales of the A-star and continued focus on tapping new market segments enabled the company achieve enhanced passenger vehicle (PV) segment market share in the domestic market (47% at the end of December compared with 43% at the end of September) and also in the export market (34% at the end of December compared with 30% at the end of September).

We believe that the PV segment would clock around 13% growth in volumes for FY10. Further, lower penetration, favourable demographics and improving per capita would support around 12% compound annual growth rate by the PV segment over the next four-five years. We remain positive on Maruti and expect it to register 23% y-o-y increase in overall volumes in FY10 aided by around 17% y-o-y growth in domestic volumes and more than 70% y-o-y growth in export volumes.

Exports registered robust 167.3% y-o-y growth on the back of A-Star volumes driven by the European markets, primarily due to the scrappage schemes, recording revenue of Rs1,290 crore. Profits grew 221.9% y-o-y to Rs687.5 crore largely due to buoyant volumes on account of spurt in demand due to the festive season in the third quarter of FY10, strong exports, better operating leverage and enhanced product mix from constant innovation. Management is cautiously optimistic about recording similar volumes in the fourth quarter of FY10 primarily due to the discontinuation of the scrappage norms, which had resulted in exports spiking during the fiscal.

The company continues to focus on long-term initiatives and has not changed its long-term capital expenditure plan of Rs9,000 crore over fiscal 2008-12.