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Maruti: Hitting the right notes!

Apr 24, 2007

Performance summary
Maruti, India’s largest passenger car manufacturer has come out with its 4QFY07 and full year FY07 results and we believe it has struck a nice balance between the present and the future. Thus, while the company’s operating margins have shrunk during 4QFY07 (on a YoY basis) owing to cost overheads related to its new plant and this has ultimately impacted its bottomline growth, its impact on the FY07 performance has been rather limited. The company’s full year performance has been impressive with the topline expanding by 22% YoY and the bottomline growing at 31% YoY, due largely to a marginal expansion in operating margins and a benign depreciation charge. The fact that the industry conditions remained buoyant also helped matters.

(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Units sold 154,400 200,112 29.6% 561,819 674,924 20.1%
Net sales 32,770 44,298 35.2% 120,522 146,539 21.6%
Expenditure 27,909 38,787 39.0% 104,256 126,635 21.5%
Operating profit (EBDITA) 4,862 5,510 13.3% 16,266 19,904 22.4%
EBDITA margin (%) 14.8% 12.4%   13.5% 13.6%  
Other income 1,153 2,050 77.8% 4,292 5,984 39.4%
Interest (net) 34 156 356.3% 204 376 84.6%
Depreciation 726 718 -1.0% 2,854 2,714 -4.9%
Profit before tax 5,255 6,686 27.2% 17,500 22,798 30.3%
Tax 1,645 2,201 33.8% 5,609 7,179 28.0%
Profit after tax/(loss) 3,609 4,486 24.3% 11,891 15,620 31.4%
Net profit margin (%) 11.0% 10.1%   9.9% 10.7%  
No. of shares (m) 288.9 288.9   288.9 288.9  
Diluted earnings per share (Rs)* 50.0 62.1   41.2 54.1  
Price to earnings ratio (x)**         14.7  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Maruti Udyog Ltd (MUL), incorporated in 1981, is India's largest passenger car manufacturer with a market share of around 52% (FY06) of the domestic car market. Suzuki (Japan) holds a 54.2% equity stake in the company. 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 on a consistent basis. However, of late, 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 4QFY07?
Swift Diesel – Successfully plugging the gap: Domestic car sales during 4QFY07 were higher by 28% YoY, driven mainly by the growth in the ‘A2’ segment, where volumes grew by a huge 45% over corresponding previous quarter. It should be remembered that the company had launched two new cars in this segment, ‘Zen Estilo’ and ‘Swift Diesel’ towards the fag end of the year and these launches seemed to have had the desired effect on sales. Pertinent to add that with the launch of ‘Swift Diesel’, the company has made its entry into the fast growing diesel car segment, which now accounts for 20% of all the passenger cars sold in the country.

On the other hand, the fast growing A3 segment and the UV segment have continued to remain the Achilles’ heel for the company as volumes shrunk by 25% and 34% on a YoY basis during 4QFY07. With the launch of a brand new platform in the A3 segment in FY08, the company is hoping to plug at least one of these yawning gaps in the near term.

Story for the full year has been no different except for the fact that domestic volumes have grown at a slightly lower rate of 21% and the A2 segment, once again the key driver has grown by 31% YoY. On the exports front, volumes have jumped an impressive 75% YoY as the company ramped up sales to non-European nations.

Sales break-up…
Domestic 4QFY06 4QFY07 % change FY06 FY07 % change
A1 25,273 19,117 -24.4% 89,223 79,245 -11.2%
C 17,870 24,333 36.2% 66,366 83,091 25.2%
A2 92,715 134,717 45.3% 335,136 440,375 31.4%
A3 9,050 6,827 -24.6% 31,939 29,697 -7.0%
Total passenger cars 144,908 184,994 27.7% 522,664 632,408 21.0%
MUV 1,367 905 -33.8% 4,374 3,221 -26.4%
Total domestic 146,275 185,899 27.1% 527,038 635,629 20.6%
Exports 8,125 14,213 74.9% 34,784 39,295 13.0%
Grand total 154,400 200,112 29.6% 561,819 674,924 20.1%

Expansion pangs: During the latter half of the fiscal, the company’s new plant at Manesar got operational and expenses incurred towards the same have continued to exert a small pressure on the company’s operating margins. Further, with raw material prices refusing to subside, the concerned cost head as a percentage of sales has also gone up over corresponding previous quarter. The company has mentioned that the contracts that have come up for renewal on the raw material costs front have been signed at levels on an average 2% higher than before. With competition in the sector intensifying, the company will have little choice but to absorb the impact of the same or may be offset it through further cost reduction measures. For the full year however, operating margins have witnessed a marginal improvement of 10 basis points, due largely to its cost reduction initiatives.

Cost break up
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Raw materials 24,371 33,666 38.1% 92,182 110,494 19.9%
% sales 74.4% 76.0%   76.5% 75.4%  
Staff cost 567 807 42.3% 2,287 2,884 26.1%
% sales 1.7% 1.8%   1.9% 2.0%  
Other expenditure 2,970 4,315 45.2% 9,787 13,257 35.5%
% sales 9.1% 9.7%   8.1% 9.0%  

A strong 78% growth in other income and a benign depreciation outgo has prevented the fall in operating margins to fully manifest itself at the bottomline level during the quarter. It should be noted that with certain fixed assets being completely written off last year, the rise in depreciation on account of the new plant has gone completely unnoticed. However, we expect the depreciation charges to increase from the current levels once full year’s charges for the new plant come into the picture.

Over the last few quarters
As seen from the table below, while the growth in topline is indeed heartening, a consistent decline in operating margins does raise some concerns over the company’s future growth potential. With pressure from all sides, it is highly unlikely that the company would be able to prevent any further fall in margins. While we had accounted for a small increase in margins in our forward estimates for the company, mainly on account of an improved raw material pricing scenario, we will have to revise our margin assumption downwards for the company.

History in quarters
  4QFY07 3QFY07 2QFY07 1QFY07 4QFY06 3QFY06
Net sales growth (% YoY) 29.6% 18.2% 12.6% 19.0% 7.6% 7.8%
OPM (%) 12.4% 13.8% 13.9% 14.6% 14.8% 15.0%
NPM (%) 10.1% 10.2% 10.7% 11.8% 10.1% 10.9%

What to expect?
At the current price of Rs 796, the stock is trading at a P/E multiple of 15 times its FY07 earnings. While we do not doubt the company’s ability to grow its volumes in the medium term despite rising competition, margins are likely to come under pressure. As mentioned before, we will have to revise our margin assumptions and will soon come out with an updated research report.

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