Volume growth isn’t enough for Maruti

Volume growth isn’t enough for Maruti

Shares of Maruti Suzuki India Ltd flared up 7.14% to Rs1,292.90 on Tuesday, more than the 5.6% jump in the Bombay Stock Exchange’s (BSE) auto index.

There could be two reasons for the positive sentiment: one, the absence of the much-anticipated 2% excise duty hike in the budget, and two, the fact that February sales volumes grew a robust 15.5% year-on-year (y-o-y) and 1.7% sequentially.

But is the rise in the scrip just a flash in the pan? Since April, Maruti Suzuki shares have underperformed the BSE Auto Index. The stock was down 7%, when the latter returned 13.8%. True, the car maker has sold more than 100,000 vehicles in the last nine months. But then, that may not necessarily translate into higher net profit to benefit the shareholder.

For now, the odds are against Maruti Suzuki. Dealers state that stiff competition in the passenger vehicle segment is forcing most car makers to offer discounts. Besides, higher marketing and promotion expenses to hold on to market share at the current robust level of 52-53% could squeeze profitability.

During the December quarter, Maruti Suzuki’s operating profit margin plummeted 580 basis points y-o-y and 100 basis points sequentially to 9.7%.

The factors that hurt profit margins continue to threaten the company. The increase in royalty, adverse impact from an appreciating yen that would make imports more expensive, and a weak euro that took the cream off its exports, along with rising raw material costs, are expected to remain.

“Additional headwinds are seen in rising interest rates and possible fuel price hikes that could moderate demand," says Umesh Karne, analyst at Brics Securities Ltd. The y-o-y growth in sales for the months of December, January and February has slowed when compared with the earlier months, but part of this is also because of the base effect.

After the December quarter results, analysts had revised earnings estimates downwards for fiscal 2011 and 2012. The current market price, which discounts one-year forward earnings around 13 times, already factors in the estimated compounded growth rate in earnings of around 10-12%.