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Maruti: Falling sales mar growth
Jan 24, 2012

Maruti Suzuki announced the third quarter results of financial year 2011-2012 (2QFY12). The company reported a 17% YoY decrease in revenues, while profits plunged by 64% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall by 17% YoY in 3QFY12 as labour trouble at Maruti's Manesar plant and weak demand hampers growth.
  • Operating margins tumble by 4.2% to 5.3% during the quarter.
  • Fall in both sales and operating profits takes its toll on the bottomline as well which declines by 64% YoY.

Financial snapshot
(Rs m)  3QFY11  3QFY12  Change  9mFY11  9mFY12  Change 
Units sold 330,687 239,528 -27.6% 820,350 684,892 -16.5%
Net sales 94,945 78,824 -17.0% 269,509 242,354 -10.1%
Expenditure 85,946 74,652 -13.1% 242,995 225,096 -7.4%
Operating profit (EBDITA) 8,999 4,172 -53.6% 26,514 17,258 -34.9%
EBDITA margin (%) 9.5% 5.3%   9.8% 7.1%  
Other income 1,302 1,604 23.2% 3,657 4,582 25.3%
Interest (net) 4 174 4719.4% 181 340 88.4%
Depreciation 2,369 2,989 26.2% 7,168 8,078 12.7%
Profit before tax 7,928 2,613 -67.0% 22,822 13,422 -41.2%
Tax 2,276 557 -75.5% 6,534 3,469 -46.9%
Profit after tax/(loss) 5,652 2,056 -63.6% 16,288 9,953 -38.9%
Net profit margin (%) 6.0% 2.6%   6.0% 4.1%  
No. of shares (m)       288.9 288.9  
Diluted earnings per share (Rs)*         57.3  
Price to earnings ratio (x)*         20.2  
*On a trailing 12 months basis

What has driven performance in 3QFY12?
  • Maruti Suzuki's (Maruti) sales fell by 17% YoY during the quarter as overall volumes dipped by 28% YoY. The prime reason for this fall was attributed to the labour troubles at the company's plant at Manesar which severely hampered production. Besides this, the company was also impacted by sluggish market conditions caused by higher fuel prices and interest rates which acted as a dampener on demand. Thus, while the domestic sales volumes dipped by 29% YoY, exports were not spared either and fell by 11% YoY. For the nine-month period, while sales volume fell by 16.5% YoY, revenues declined by 10% YoY.

  • Maruti's operating margins plunged by 4.2% to 5.3% this quarter. Loss in production at the Manesar plant was one of the reasons for the fall in operating profits. Not just that, because of the tepid environment in the domestic market, the company spent more on advertising and sales promotion which also put pressure on margins. The sharp depreciation of the rupee also contributed to the margin contraction as cost of imports rose. For the nine month period, operating profits fell by 35% YoY.

    Cost break-up...
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Raw materials 74,455 62,433 -16.1% 209,314 190,944 -8.8%
    % sales 78.4% 79.2%   77.7% 78.8%  
    Staff cost 2,325 2,090 -10.1% 5,502 5,878 6.8%
    % sales 2.4% 2.7%   2.0% 2.4%  
    Other expenditure 9,166 10,129 10.5% 28,179 28,274 0.3%
    % sales 9.7% 12.9%   10.5% 11.7%  
    Total 85,946 74,652   242,995 225,096  

  • With sales and operating profits declining, net profits were not spared either as they plunged by 64% YoY. Volatility in exchange rates further compounded the company's woes. For the nine month period, net profits dipped by 39% YoY.

What to expect?
At the current price of Rs 1,158, the stock trades at a multiple of 8.2 times our estimated FY14 cash flow per share and at 13.1 times our estimated earnings per share. The company's performance over the last few quarters has been impacted by the slowdown in the overall auto industry and labour troubles at Manesar which severely impacted production and thereby growth. The next few quarters are also likely to be tight for the company as it looks to make up for the loss in production in the quarters gone by. Volatility in exchange rates especially the Yen could also have a bearing on the company's fortunes.

However, these are near term concerns and from a longer term perspective the robust growth in the Indian economy, thrust on infrastructure and rising disposable incomes is expected to spur the growth in Maruti's sales volumes. The company also stands to benefit on the back of its strong reach, relatively affordable products and strong brand and after sales services. Overall, we advise investors to hold on to the stock from a long term perspective.

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