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Maruti Suzuki: Strong operating performance

Jan 28, 2014

Maruti Suzuki announced its results for the third quarter ended December 2013 recently. The company reported a 2.7% YoY decline in sales while net profits grew by 35.9% YoY. Here is our analysis of the results.

Performance summary
  • Net sales decline by 2.7% YoY led by the 4.4% YoY fall in volumes.
  • Operating profits rise by around 52.0% YoY and margins increase to 12.4% in the quarter from 8.0% in 3QFY13. The same is due to substantial reduction in raw material costs (as a percentage of sales).
  • Net profits up by 35.9% YoY led by the healthy performance at the operating level.
  • The Board of the company approved implementation of expansion of manufacturing facilities in Gujarat through a 100% Suzuki subsidiary. The latter will produce vehicles as per the company's requirements. Also, all vehicles such produced will be sold to the company only.

Financial performance: Consolidated snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Total Vehicles Sold (No.) 301,453 288,151 -4.4% 827,725 830,171 0.3%
Net sales 112,003 108,938 -2.7% 302,839 315,992 4.3%
Expenditure 103,091 95,391 -7.5% 280,539 277,569 -1.1%
Operating profit (EBDITA) 8,913 13,548 52.0% 22,301 38,424 72.3%
EBDITA margin (%) 8.0% 12.4%   7.4% 12.2%  
Other income 1,886 1,170 -38.0% 4,134 4,223 2.2%
Finance costs 459.3 448 -2.5% 1171.8 1324.2 13.0%
Depreciation 3,583 5,414 51.1% 10,453 15,207 45.5%
Profit before tax 6,756 8,856 31.1% 14,810 26,115 76.3%
Tax 1,743 2,044 17.2% 3,285 6,285 91.3%
Profit after tax/(loss) 5,013 6,811 35.9% 11,525 19,830 72.1%
Net profit margin (%) 4.5% 6.3%   3.8% 6.3%  
No. of shares (m)         302  
Diluted earnings per share (Rs)*         106.7  
Price to earnings ratio (x)*         14.7  
(* On a trailing 12-month basis)

What has driven performance in 3QFY14?
  • Maruti Suzuki India Ltd (MSIL) reported 2.7% YoY decline in net sales. The decline was mainly due to fall in the volumes (down 4.4% YoY) for the quarter. While domestic sales volumes remained almost flat on a YoY basis, the export sales volumes declined significantly by 39% YoY.

  • The operating margins for the quarter expanded by 4.5% YoY and stood at 12.4%. Despite a decline in sales volumes and revenues and higher discounts, margins improved due to better cost management. Further, decline in the export sales volumes also led to a significant reduction in operating expenses (mainly ocean freight). The royalty paid (as a % of sales) stood at 5.9%. The discounts during the quarter have gone up significantly, from around Rs 122 bn in 3QFY13 to 194 bn this quarter, versus Rs 175 bn in the preceding quarter.

    Cost breakup
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Raw materials/ purchases 87,842 78,014 -11.2% 237,854 224,314 -5.7%
    % sales 78.4% 71.6%   78.5% 71.0%  
    Staff cost 2,311 2,997 29.7% 6,821 9,671 41.8%
    % sales 2.1% 2.8%   2.3% 3.1%  
    Other expenditure 12,938 14,380 11.1% 35,864 43,584 21.5%
    % sales 11.6% 13.2%   11.8% 13.8%  
    Total expenditure 103,091 95,391 -7.5% 280,539 277,569 -1.1%
    % sales 92.0% 87.6%   92.6% 87.8%  

  • The net profits for the quarter grew by 36% YoY. The growth in the net profits was much lower than growth in the operating profits due to decline in other income and increase in the depreciation expenses. Also, the discounts offered by the company impacted the bottomline. The increase in depreciation expenses was mainly on account of the third plant at Manesar and due to the new diesel engine production plant that the company started in mid September. There was a favorable impact of currency movement (gain of around Rs 1.4 bn) this quarter as compared to 3QFY13 .But sequentially it was a loss since compensation had to be paid to vendors to whom the company pays with the quarter lags.
What to expect?

The management has stated that the demand from rural areas is strong. The company witnessed 18% YoY growth for the first nine months and the rural volumes comprise around 30%.

During the quarter, the company was able to offset the unfavourable impact of currency to some extent because of cost reduction and gains on the export side. Further, the company has done mark to market on royalty, which is at a significantly lower rate than in the previous quarter. The management has stated that as far as hedging is concerned, there is possibility of risks on dollar rupee exposure which remains open (royalty exposure).

As per the management, the discounts are likely to continue at least in the short term to deal with demand contraction in a high interest rate and inflationary environment. The management has stated that the company has some interesting product launches ahead and it will have at least one new model every year and will cover all the segments of the market.

For FY14, the capex is estimated at Rs 40 bn while the employee costs are likely to remain in the range of 2.7-2.8% of sales. The major announcement that Maruti Suzuki made was with respect to its Gujarat facility.

As per the management, the total investment in the project for the initial 3-4 years (estimated at around Rs 30 bn) will be done by the subsidiary of Suzuki. As such, MSIL will benefit by not losing out on the earnings on investment, which otherwise would have had to be made in the new capacity. Further, according to the company, the pricing of the cars will be done so as to cover the direct cost of production (including royalty) plus the profit (after tax) that would be needed for incremental capex (i.e. capex once the first unit is fully commissioned with a capacity of around 250,000 cars). Hence, the second unit will be financed with the earnings of the first unit. As per the management, once first unit is fully commissioned (once the production of around 250,000 units is reached), the company will be earning much higher return on investment through this arrangement since the returns will be calculated only on the capital that MSIL has invested.

As per the management, net margins for the company from Gujarat plant will be in line with the existing margins. The management has stated that this arrangement will benefit Suzuki as well since they will be earning higher on cash which otherwise would not have yielded much in Japan (with low interest rates) where investment opportunities are less.

As per the management, all the capex related incentives will accrue to the entity bearing the capex and will be built into cost of production of cars sold to MSIL. Having 56% stake in the company, Suzuki will have a share in the profit made by MSIL through the sale of these cars. The production is likely to start in around 3 to 4 years. Post Gujarat facility, the company doesn’t foresee the need for further expansion.

At the current price of Rs 1,619, the stock is trading at a multiple of 8.3 times our estimated FY16 cash flow per share. While the fundamentals of the company remain strong, the stock is fairly valued and hence our view is that investors buy the stock at lower levels from the current price.

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