Maruti Suzuki: good show, limited mileage

Maruti Suzuki: good show, limited mileage

Expectations for Maruti Suzuki India Ltd’s June quarter performance were tepid, given flat sales volume, a strike at one of its plants that hampered production and higher commodity prices. But the country’s largest car maker has beaten estimates. Revenue grew 3.6% from a year ago. Net profit at 549 crore was 27% higher than the Reuters poll estimates.

The reason was a 4.3% year-on-year jump in realizations—an outcome of a favourable product mix. This surprised the Street, which expected large discounts to eat into realizations. The sales mix also translated into lower-than-expected royalty payments at 4.8%, compared with its normal 5-5.5%.

In an analysts’ conference call, the management highlighted its focus on improving productivity. This is reflected in the stable raw material cost as a percentage of sales over the preceding quarter and a marginal increase from a year ago, despite relatively lower operating leverage and higher commodity prices. However, the dip in volume, partly due to the 13-day strike, trickled down to register a 15% lower operating profit than the year-ago period. Operating margins dipped about 90 basis points from a year ago, while they were almost unchanged when compared with the preceding quarter. Margins were also affected by the rising Japanese yen against the Indian rupee, making imports costlier. Of course, the management reiterated its efforts to steadily increase localization and reduce imports.

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Operational efficiency trickled down to the higher- than-expected net profit. However, if we adjust for the one-time royalty arrears paid in the year-ago period, the net profit growth was barely around 3.6% compared with the 18% growth rate reported.

The Street was not euphoric about the results, with its shares closing marginally lower at around 1,177.95 apiece. Perhaps the timing was bad as it coincided with the central bank’s hike in interest rates, which is expected to cool off demand, more so in passenger cars. Besides, the management said a slowdown was visible in the lower end and in the conversion ratio of footfall to actual purchases. It hinted at higher discount offers in the coming months.

“Demand is expected to falter due to higher fuel costs and interest rates, while the currency volatility could impact margins in the near term," said Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd.

Maruti Suzuki’s stock trades at around 12 times estimated fiscal 2013 earnings. Flat earnings growth in fiscal 2012 and a compounded growth rate of barely 8-10% in the next 18 months leave investors with limited mileage in the medium term.

Graphic by Yogesh Kumar/Mint

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