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Maruti: Volumes rise, profits fall - Views on News from Equitymaster

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Maruti: Volumes rise, profits fall
Apr 26, 2011

Maruti Suzuki announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company reported a 20% YoY increase in revenues, while profits grew by 1% YoY. Here is our analysis of the results.

Performance summary
  • Net sales rise by 25% YoY in FY11 on the back of 25% YoY increase in volumes.
  • Operating profits decline by 7% YoY as operating margins decline by 3.4% to 9.9% during FY11. All expense heads rise (as a percentage of sales) during the quarter.
  • Net profits decline by 8% YoY in line with the decrease in operating profits.
  • The Board recommends a dividend of Rs 7.5 per share (dividend yield of 0.6%).

(Rsm) 4QFY10 4QFY11 Change FY10 FY11 Change
Units sold 287,422 343,340 19.5% 1,018,365 1,271,005 24.8%
Net sales 84,858 100,922 18.9% 296,230 370,401 25.0%
Expenditure 73,781 90,825 23.1% 256,721 333,757 30.0%
Operating profit (EBDITA) 11,077 10,097 -8.8% 39,509 36,644 -7.3%
EBDITA margin (%) 13.1% 10.0%   13.3% 9.9%  
Other income 824 1,199 45.6% 5,001 4,823 -3.6%
Interest (net) 129 64 -50.6% 335  244 -27.1%
Depreciation 2,230 2,967 33.0% 8,250 10,135 22.8%
Profit before tax 9,541 8,266 -13.4% 35,925 31,088 -13.5%
Tax 2,976 1,667 -44.0% 10,949 8,201 -25.1%
Profit after tax/(loss) 6,565 6,599 0.5% 24,976 22,886 -8.4%
Net profit margin (%) 7.7% 6.5%   8.4% 6.2%  
No. of shares (m)       288.9 288.9  
Diluted earnings per share(Rs)*         79.2  
Price to earnings ratio(x)*         16.7  
(*On a trailing 12-month basis)

What has driven performance in FY11?
  • Maruti Suzuki (Maruti) reported a 25% YoY increase in net sales on the back of a 25% YoY increase in volumes. Volumes growth during the quarter was led by the domestic market, which grew by 30% YoY. Exports, on the other hand, declined by 6% YoY. Domestic sales volumes formed about 89% of total sales volumes. Growth in domestic sales was led by the company's C, A3 and A2 segments, with their respective volumes rising by 59% YoY, 32% YoY and 28% YoY respectively.

    Maruti's gross revenues (including excise duty) increased by 27% YoY during the year ended March 2011, while net sales (excluding excise duty) increased by about 25% YoY, indicating that the company did not pass on the hike in excise duties to customers.

  • Maruti's operating profits declined by 7% YoY as operating expenses increased at a faster pace of 30% YoY as compared to the increase in sales. With the same happening, the company's operating margins contracted to 9.9% from 13.3% last year. Raw material expenses, the largest cost head, increased by 29% and formed about 78% of revenues as compared to 76% last year. Staff costs also increased by 29% YoY in absolute terms to 1.9% 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.

    Cost break-up...
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Raw materials 64,127 78,629 22.6% 224,134 287,942 28.5%
    % sales 75.6% 77.9%   75.7% 77.7%  
    Staff cost 1,534 1,534 0.0% 5,456 7,036 29.0%
    % sales 1.8% 1.5%   1.8% 1.9%  
    Other expenditure 8,121 10,662 31.3% 27,131 38,779 42.9%
    % sales 9.6% 10.6%   9.2% 10.5%  

  • Maruti's net profits declined by 8% YoY during FY11. This was largely due to a poor performance at the operating level. While lower interest costs and tax expenses helped the company to a certain extent, it was all negated as depreciation expenses rose by 23% YoY and other income fell by 4% YoY.

What to expect?
At the current price of Rs 1,325, the stock trades at a multiple of 8.6 times our estimated FY13 cash flow per share and at 12.9 times our estimated earnings per share. Going forward, the robust growth in the Indian economy, thrust on infrastructure and rising disposable incomes is expected to spur the growth in Maruti's sales volumes. The company also stands to benefit on the back of its strong reach, relatively affordable products and strong brand and after sales services. That said, pressures persist on account of rising input costs and higher interest rates which are likely to hinder demand. The Japanese earthquake and tsunami has also sparked fears of declining margins on account of an appreciation of the Yen and shortage of auto components. However, we believe that these are near term pressures and the company stands to benefit from a strong growth in the Indian economy in the longer term. We maintain our view on the stock from a long term perspective. (ResearchPro subscribers can view latest updates here).

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