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Maruti: Its just the opposite

Jan 24, 2005

Performance Summary
Maruti Udyog, the country's largest passenger car manufacturer, has posted impressive results for the third quarter ended December 2005. While net sales has risen by 27% during the quarter, despite input cost pressure faced by other auto majors, Maruti has managed to improve margins in 3QFY05. This combined with higher other income has resulted in bottomline outpacing the topline growth significantly.

(Rs m) 3QFY04 3QFY05 Change
Net sales 22,700 28,890 27.3%
Expenditure 20,580 25,317 23.0%
Operating profit (EBDITA) 2,120 3,572 68.5%
Operating profit margin (%) 9.3% 12.4%
Other income 1,075 1,275 18.6%
Interest 102 75 -27.1%
Depreciation 1,126 1,052 -6.6%
Profit before tax 1,966 3,721 89.2%
Tax 559 1,324 137.0%
Profit after tax/(loss) 1,408 2,397 70.3%
Net profit margin (%) 6.2% 8.3%
No. of shares (m) 288.9 288.9
Diluted earnings per share (Rs)* 19.5 33.2
P/E (x) 12.3
(* annualised)

What is the company's business?
Maruti Suzuki, incorporated in 1981, is the country's largest passenger car manufacturer with a market share of 60% in FY04 in the domestic market. While Suzuki, Japan holds a 54.2% equity stake in the company, the government of India has brought down its equity stake to 20.8% through two phases of disinvestment. 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. However, 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 3QFY05?
Segment B drives growth: While the detailed numbers are not yet available, the company has been clocking on an average 20,000 units per month the 'Segment B' (comprising Alto, Wagon R and Zen) during this fiscal, which has buoyed the overall volume growth. Our estimate suggest that volume growth of this segment in 3QFY05 was 32% YoY. The table below shows the quarterly sales volume (passenger cars) and the company's market share. Evidently, market share has declined on a overall basis owing to new model launches in the premium segment where Maruti has a weak presence. As we go forward, the ability to maintain market share in the competitive car segment depends on the new launches.

Cars - Performance snapshot
(units) 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05
Volumes sold 90,728 97,758 102,515 126,572 109,935 117,597 121,166
% YoY growth 36.3% 17.3% 29.6% 29.1% 21.2% 20.3% 18.2%
% market share 55.8% 53.1% 57.0% 55.0% 55.7% 53.1% 54.6%

Margin defy peers: Despite concerns regarding rising input costs, Maruti has managed to steadily improve operating margins in the last few quarters (graph below). This has been possible partly because of the full operation of the aluminium casting facility, import substitution and value engineering efforts. However, considering the fact the company has to launch new models in FY05 and beyond, the cost associated with the same is likely to increase. This may pressure margins. Given the fact that Maruti's margins are among the highest in the global passenger car segment, it remains to be seen whether the company will be able to maintain the same. However, if steel prices softens in FY06, this could provide a major cushion to margins.

The stock currently trades at Rs 408 implying a price to earnings multiple of 12.3 times annualised 3QFY05 earnings. We will put up a detailed analysis soon.

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