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Maruti: The depreciation dampener - Views on News from Equitymaster
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Maruti: The depreciation dampener
Apr 24, 2008

Performance summary
  • Led by 13% YoY growth in volumes, topline for FY08 grows by 22% YoY. Actual sales figure lower by 4% as compared to our estimates.

  • Operating margins drop by 1.5% on the back of higher raw material and other expenses (both as percentage of sales).

  • Significantly higher depreciation charges and interest costs restrict the bottomline growth to 11% YoY for the fiscal. Net profits have come in 6% below our expectations.

  • Margin pressure and higher depreciation have also impacted 4QFY08 performance wherein bottomline has fallen 34% YoY despite an 8% YoY growth in topline.

  • Board recommends dividend of Rs 5 per share (dividend yield of 0.7%).

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Units sold 200,112 202,219 1.1% 674,924 764,842 13.3%
Net sales 44,298 47,629 7.5% 146,539 178,603 21.9%
Expenditure 38,787 43,073 11.0% 126,635 156,929 23.9%
Operating profit (EBDITA) 5,510 4,556 -17.3% 19,904 21,674 8.9%
EBDITA margin (%) 12.4% 9.6%   13.6% 12.1%  
Other income 2,050 3,070 49.8% 5,984 9,635 61.0%
Interest (net) 156 161 3.7% 376 596 58.4%
Depreciation 718 3,111 333.2% 2,714 5,682 109.4%
Profit before tax 6,686 4,354 -34.9% 22,798 25,031 9.8%
Tax 2,201 1,377 -37.4% 7,179 7,722 7.6%
Profit after tax/(loss) 4,486 2,977 -33.6% 15,620 17,308 10.8%
Net profit margin (%) 10.1% 6.2%   10.7% 9.7%  
No. of shares (m) 288.9 288.9   288.9 288.9  
Diluted earnings per share (Rs) 62.1 41.2   54.1 59.9  
Price to earnings ratio (x)         12.5  

What has driven performance in FY08?
  • Maruti closed the year with a 13% YoY growth in volumes. However, 4QFY08 sales, which came in higher by a mere 1%, dragged down the performance a bit. Growth in sales, in value terms, stood at 22% YoY for the full year. This was largely a result of improved product mix. The A3 segment, which comprises of high value cars like the ‘SX4’ and the newly launched ‘Dzire’ saw its volumes jump 66% YoY for the full year thus helping the company improve realisation per car sold. In terms of geographical growth, while domestic volumes were higher by 12% YoY, exports chipped in with a record performance as volumes jumped 35% YoY. This was made possible on account of the company foraying into newer countries particularly the ones in the Asian region. As far as market share is concerned, it was more or less maintained (at around 58%) in the passenger car segment as growth in units sold was mostly in line with the overall industry growth rate.

    Sales break-up…
    Domestic Models 4QFY07 4QFY08 % change FY07 FY08 % change
    A1 M-800 19,117 17,568 -8.1% 79,245 69,553 -12.2%
    C Omni, Versa 24,333 24,170 -0.7% 83,091 89,729 8.0%
    A2 Alto, Wagon -R 134,717 131,885 -2.1% 440,375 499,280 13.4%
    A3 SX4, Dzire 6,827 12,433 82.1% 29,697 49,335 66.1%
    Total passenger cars   184,994 186,056 0.6% 632,408 707,897 11.9%
    MUV Gypsy 905 1,129 24.8% 3,221 3,921 21.7%
    Total domestic   185,899 187,185 0.7% 635,629 711,818 12.0%
    Exports   14,213 15,034 5.8% 39,295 53,024 34.9%
    Grand total   200,112 202,219 1.1% 674,924 764,842 13.3%

  • On the operating margins front, prices of key raw materials like steel, aluminium and rubber have continued to rule high. Accordingly, operating margins for the full year have taken a hit of 1.5%. Apart from input costs, other expenses have also contributed to the downfall in margins. Margin impact for 4QFY08 has been even more severe as the same has fallen by 2.8%.

    Cost break-up…
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 33,666 36,415 8.2% 110,494 136,468 23.5%
    % sales 76.0% 76.5%   75.4% 76.4%  
    Staff cost 807 880 9.1% 2,884 3,562 23.5%
    % sales 1.8% 1.8%   2.0% 2.0%  
    Other expenditure 4,315 5,778 33.9% 13,257 16,900 27.5%
    % sales 9.7% 12.1%   9.0% 9.5%  

  • Depreciation charges more than doubled for the full year while they witnessed a more than four fold jump during the fourth quarter, both on a YoY basis. As per reports, in view of the increasing competition in the domestic markets, Maruti has adopted a more aggressive stance on depreciation, thus leading to a huge jump in the same. It is believed that depreciation for equipment and tooling assets and for dies has been changed from 13 years and 5 years respectively to 8 years and 4 years respectively. In that sense, last year’s depreciation numbers are not strictly comparable with that of current year. Apart from this higher depreciation, a mark to market loss of Rs 505 m on derivative related investments has also impacted the profits of the company that have declined by 34% YoY for 4QFY08 and risen by 11% YoY for FY08.

    What to expect?
    At the current price of Rs 744, the stock is trading at a multiple of 7.5 times our estimated FY10 cash flow per share. The aggressive stance taken by Maruti towards depreciation points to the fact that the capital needs of the company will increase at a faster pace in the future as compared to the recent past, thus dragging down the overall profitability. We will take this and other factors into consideration while reviewing our estimates for the company.

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