Maruti Suzuki: A strong third quarter

Maruti Suzuki announced its results for the third quarter ended December 2015 recently. The company reported a 20% YoY and 27% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary

• Net sales grow by 20% YoY led by the 15.5% YoY increase in volumes.
• Operating profits grow by an impressive 34% YoY as margins expand by 1.6% to 14.4% in 3QFY16. The same is due to lower raw material costs (as a percentage of sales).
• Net profits grow at a slightly lower rate of 27% YoY on account of higher tax expenses.

What has driven performance in 3QFY16?

• Maruti Suzuki's revenues during the quarter grew by a healthy 20% YoY with volumes up by 15.5% YoY led by the festive season and newer models. In the domestic market, the 16% YoY volume growth was largely led by the compact and super compact segments as volumes grew 23% YoY and 105% YoY respectively. But these were not the only segments that did well. Utility vehicles (UVs) grew by a healthy 58% YoY, while vans logged in volume growth of 11% YoY. Exports were subdued during the quarter as volumes were up 9% YoY. Volumes were impacted in Sri Lanka on account of the hike in duty structure.
• Maruti's operating margins improved by 1.6% to 14.4% in 3QFY16 on account of a fall in raw material costs and other expenditure (as percentage of sales). Fall in raw material costs was attributed to softening commodity prices as well as initiatives to reduce material costs. Staff costs were higher on account of provisions made based on the new Bonus Act.
• Net profits grew at a slightly lower rate of 27% YoY on account of higher tax expenses. This is despite the reduction in interest costs.

What to expect?

At the current price of Rs 3,936, the stock trades at a multiple of 12.3 times our estimated FY18 cash flow per share. Going forward, Maruti Suzuki aims to reach sales volume target of 2 m units over the next five years and in this regard plans to launch 20 new models in the same period. The company has also outlined a capex of Rs 30 bn in FY16, which will be towards new product launches, R&D, marketing expenses and maintenance. As far as the Gujarat plant is concerned, work is progressing as per schedule and the first phase (capacity of 250,000 units) is expected to commence by March 2017. As far as valuations are concerned, our view is that investors do not buy the stock at current levels.