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Maruti: Merger dents profits! - Views on News from Equitymaster

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Maruti: Merger dents profits!
Jan 22, 2007

Performance summary
Maruti, India’s largest passenger car manufacturer announced its 3QFY07 results today. While prima facie it appears that the company has faced margin pressure during the quarter, it should be borne in mind that the profit before tax for the current quarter has been arrived at after deducting the loss of the erstwhile wholly owned subsidiary MSAIL, which has now been merged with Maruti, for the period from April 01, 2006 to December 31, 2006, amounting to Rs 546.10 million. Of this amount, Rs 213.20 million relates to the period April 01, 2006 to September 30, 2006 (corresponding period last year: Nil). If one were to exclude the same, the performance would have shown a marked improvement.

Financial performance: Standalone snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
No. of units sold 145,013 172,451 18.9% 407,422 474,812 16.5%
Net sales 31,142 36,795 18.2% 87,812 102,241 16.4%
Expenditure 26,483 31,723 19.8% 76,408 87,848 15.0%
Operating profit (EBDITA) 4,659 5,072 8.9% 11,405 14,394 26.2%
EBDITA margin (%) 15.0% 13.8%   13.0% 14.1%  
Other income 1,066 1,284 20.5% 3,139 3,934 25.3%
Interest (net) 17 157 809.8% 170 221 30.0%
Depreciation 681 759 11.5% 2,129 1,995 -6.3%
Profit before tax 5,027 5,440 8.2% 12,245 16,112 31.6%
Tax 1,637 1,676 2.4% 3,964 4,978 25.6%
Profit after tax/(loss) 3,390 3,764 11.0% 8,281 11,134 34.4%
Net profit margin (%) 10.9% 10.2%   9.4% 10.9%  
No. of shares (m) 288.9 288.9   288.9 288.9  
Diluted earnings per share (Rs)* 46.9 52.1   38.2 51.4  
Price to earnings ratio (x)**         18.3  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Maruti Udyog Ltd (MUL), incorporated in 1981, is India's largest passenger car manufacturer with a market share of around 52% (FY06) of the domestic car market. Suzuki (Japan) holds a 54.2% equity stake in the company. After remaining a near monopoly till 1992, the entry of other multinationals and the emergence of domestic competition have resulted in the company losing market share on a consistent basis. However, of late, the company has been able to steady its share in the Indian passenger car segment through aggressive capacity expansion and new product introductions.

What has driven performance in 3QFY07?

Domestic 3QFY06 3QFY07 % change 9mFY06 9mFY07 % change
A1 23,736 19,683 -17.1% 63,950 60,128 -6.0%
C 16,264 21,426 31.7% 48,496 58,758 21.2%
A2 87,917 114,461 30.2% 242,421 305,658 26.1%
A3 7,954 6,910 -13.1% 22,889 22,870 -0.1%
Total passenger cars 135,871 162,480 19.6% 377,756 447,414 18.4%
MUV 1,256 628 -50.0% 3,007 2,316 -23.0%
Total domestic 137,127 163,108 18.9% 380,763 449,730 18.1%
Exports 7,886 9,073 15.1% 26,659 25,082 -5.9%
Grand total 145,013 172,181 18.7% 407,422 474,812 16.5%

It’s the A2 segment again: Overall volumes improved 19% YoY during the quarter. The same were primarily driven by an impressive 30% growth in the A2 segment offerings viz. Alto, Wagon R and Swift. On the other hand, the segments that witnessed a fall in volumes were A1, A3 and MUVs. While the A1 segment offering, M800, has been cannibalized by the company’s own A2 segment offering Alto, it is the decline in A3 and MUVs that is a matter of concern for the company. While competition has intensified, the fact that the company has not launched any new products in these segments in recent times has also contributed towards the decline. As far as our projections are concerned, while we have assumed a lower volume growth of 16% YoY for FY07, the 19% YoY growth in revenues that we have assumed obviates the need to have a re-look at our numbers.

Merger masks the true operating picture: As mentioned earlier, while the financials indicate margin pressure, if one adds back the Rs 546 m loss that the company’s subsidiary has raked up, the operating margin actually shows a marginal improvement of 30 basis points. Further, raw material costs as a percentage of sales have also come down during the quarter. This is commendable in the light of the fact that prices of key inputs like steel and rubber have been on the rise in recent times and other auto companies, notably the two-wheeler ones have been facing significant pressure on this front.

cost break up
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Raw materials 23,686 27,662 16.8% 67,803 76,827 13.3%
% sales 76.1% 75.2%   77.2% 75.1%  
Staff cost 584 738 26.4% 1,721 2,078 20.7%
% sales 1.9% 2.0%   2.0% 2.0%  
Other expenditure 2,214 3,323 50.1% 6,884 8,943 29.9%
% sales 7.1% 9.0%   7.8% 8.7%  

Lower depreciation provides some succor: While interest outgo has gone up more than 9 times, albeit on a lower base, it is the relatively smaller rise in depreciation outgo that has provided some respectability to the bottomline. However, with the company having embarked on a huge capex plan, we expect depreciation to rise significantly from the current levels. Not withstanding the small rise in depreciation, the bottomline growth would have been much less for Maruti

What to expect?
At the current price of Rs 935, the stock is trading at a price to earnings multiple of 18 times its trailing twelve month performance. In our view, given the proposed entry of several multinationals into the domestic passenger car market and the consequent pressure on the company to invest more in new product development and marketing expenses, the margin levels are unlikely to be sustainable. Hence, we are not enthused by the current valuation levels and continue to believe that risks outweigh returns from a medium term perspective.

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