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Maruti: Volumes grow, profits don't - Views on News from Equitymaster
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Maruti: Volumes grow, profits don't
Feb 1, 2011

Maruti Suzuki announced its 3QFY10 results recently. The company reported a 26% YoY increase in revenues, while profits fell by 18% YoY only. Here is our analysis of the results.

Performance summary
  • Net sales rise by 26% YoY on the back of 28% YoY increase in volumes.
  • Operating profits decline by 21% YoY as operating margins decline to 9.5% during 3QFY11. All expense heads rise (as a percentage of sales) during the quarter.
  • Net profits decline by 18% YoY in line with the decrease in operating profits.
  • During 9mFY11, the company's revenues grow by 27% YoY, while profits decline by 12% YoY.


(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Units sold 258,026 330,687 28.2% 730,943 927,665 26.9%
Net sales   75,220   94,945 26.2% 211,999 269,479 27.1%
Expenditure   63,881   85,927 34.5% 183,566 242,933 32.3%
Operating profit (EBDITA)   11,339 9,018 -20.5%   28,432 26,546 -6.6%
EBDITA margin (%) 15.1% 9.5%   13.4% 9.9%  
Other income 913 1,283 40.6% 4,178   3,624 -13.2%
Interest (net) 84 4 -95.7% 207 181 -12.5%
Depreciation 2,028 2,369 16.8% 6,020   7,168 19.1%
Profit before tax   10,140 7,928 -21.8%   26,384 22,822 -13.5%
Tax 3,265 2,276 -30.3% 7,973   6,534 -18.0%
Profit after tax/(loss) 6,875 5,652 -17.8%   18,411 16,288 -11.5%
Net profit margin (%) 9.1% 6.0%   8.7% 6.0%  
No. of shares (m)       288.9   288.9  
Diluted earnings per share (Rs)*         79.1  
Price to earnings ratio (x)*         15.9  
(*On a trailing 12-month basis)

What has driven performance in 3QFY11?
  • Maruti Suzuki (Maruti) reported a 26% YoY increase in net sales on the back of a 28% YoY increase in volumes. Volumes growth during the quarter was led by the domestic market, which grew by 37% YoY. Exports, on the other hand, declined by 20% YoY. The reason for the latter was lower sales to Europe. Domestic sales volumes formed about 91% of total sales volumes. Growth in domestic sales was led by the company's C, A2 and A3 segments, with their respective volumes rising by 79% YoY, 35% YoY and 26% YoY respectively.

  • Maruti's gross revenues (including excise duty) increased by 29% YoY during the quarter ended December 2010, while net sales (excluding excise duty) increased by about 26% YoY, indicating that the company did not pass on the hike in excise duties to customers.

    Sales break-up...
    Domestic 3QFY10 3QFY11 % change
    A1      8,738      6,869 -21.4%
    C    24,426     43,612 78.5%
    A2  159,678   216,057 35.3%
    A3    25,388     32,098 26.4%
    B        680         891 31.0%
    Total domestic  218,910   299,527 36.8%
    Exports    39,116     31,160 -20.3%
    Grand total  258,026   330,687 28.2%

  • Maruti's operating profits declined by a sharp 21% YoY as operating expenses increased at a faster pace of 35% YoY as compared to the increase in sales. With the same happening, the company's operating margins contracted sharply to 9.5% from 15.1% last year. Raw material expenses, the largest cost head, increased by 33% and formed about 78% of revenues as compared to 74% last year. Staff costs also increased sharply by 76% YoY in absolute terms to 2.4% of sales as compared to 1.8% last year. As for other expenses, the same increased on a year on year basis on the back of higher royalty payments. It must be noted that similar to the preceding quarter, Maruti felt the pressure at the operating level on the back of a stronger Yen against the Rupee and the weak Euro against the Rupee.
    Cost break-up
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Raw materials 55,901 74,455 33.2%        160,007     209,314 30.8%
    % sales 74.3% 78.4%   75.5% 77.7%  
    Staff cost   1,325   2,325 75.5%   3,923 5,502 40.3%
    % sales 1.8% 2.4%   1.9% 2.0%  
    Other expenditure   6,655   9,147 37.4% 19,637        28,117 43.2%
    % sales 8.8% 9.6%   9.3% 10.4%  

  • Maruti's net profits declined by 18% YoY during 3QFY11. This was largely due to a poor performance at the operating level. While other income and lower interest costs helped the company to a certain extent, it was all negated as depreciation expenses rose by 17% YoY. However, a lower tax outgo helped the company increase the profits to a certain extent.

What to expect?
At the current price of Rs 1,257, the stock trades at a multiple of 8 times our estimated FY13 cash flow per share and at 12 times our estimated earnings per share (ResearchPro subscribers, kindly click here). Purely on the basis of valuations, the stock seems quite attractive at the moment. However, considering the overall headwinds such as higher interest costs, rising fuel prices, increasing commodity prices, increasing competition, there would be some uncertainty surrounding the company in the medium term. While Maruti seems to be the best equipped to take on the competition (on the back of its strong reach, relatively affordable products, strong brand and after sales services) in the long run, we would still like to see a wait and watch approach, especially on the margin front.

Keeping all factors into consideration, we believe the stock is just about fairly valued at the moment.

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