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Maruti: Margins in wrong lane - Views on News from Equitymaster
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Maruti: Margins in wrong lane
Jul 21, 2008

Performance summary
  • Led by 13.5% YoY growth in volumes, topline registers a robust 21% YoY growth during 1QFY09
  • Margins fall by a huge 490 basis points on the back of pressure across all the major cost heads

  • Bottomline decline restricted to 7% YoY on the back of surge in other income and lower tax outgo

(Rs m) 1QFY08 1QFY09 Change
No of units sold 169,669 192,584 13.5%
Net sales 39,308 47,536 20.9%
Expenditure 33,560 42,899 27.8%
Operating profit (EBDITA) 5,748 4,636 -19.3%
EBDITA margin (%) 14.6% 9.8%  
Other income 2,233 3,288 47.3%
Interest (net) 151 168 11.5%
Depreciation 822 1,661 102.0%
Profit before tax 7,007 6,095 -13.0%
Extraordinary income/(expense) - -  
Tax 2,011 1,437 -28.6%
Profit after tax/(loss) 4,996 4,659 -6.8%
Net profit margin (%) 12.7% 9.8%  
No. of shares (m) 288.9 288.9  
Diluted earnings per share (Rs)* 69.2 58.7  
Price to earnings ratio (x)*   11.2  

What has driven performance in 1QFY09?
  • Battling a rising interest rate scenario and tight liquidity conditions, the company has reported a near 14% growth in volumes on a YoY basis, a performance that we believe is impressive under the circumstances. Company’s increased focus on ‘C segment’ cars has led to this segment grow by an impressive 44% YoY and once again emerge as the fastest growing among all the company’s segments. However, it has been the ‘A2 segment’ that has continued to contribute the most to the company’s increased volumes, growing by a decent 14% YoY. Among other segments, while the ‘A1 segment’ has declined 8% YoY, sales in the ‘C segment’ have remained virtually stagnant. MUV sales and exports have also grown impressively, registering a strong 158% and 38% YoY growth respectively. Topline in value terms has stood at 20% YoY and has come in much higher than the growth in volumes, thanks mainly to greater sales of high value ‘C segment cars’.

    sales break up
    Segment 1QFY08 1QFY09 (% change)
    A1 17,994 16,649 -7.5%
    C 20,631 20,761 0.6%
    A2 110,413 125,427 13.6%
    A3 11,056 15,940 44.2%
    Total Passenger cars 160,094 178,777 11.7%
    MUV 510 1,316 158.0%
    Total domestic 160,604 180,093 12.1%
    Export 9,065 12,491 37.8%
    Total Sales 169,669 192,584 13.5%

  • As far as operating performance is concerned, the company’s operating margins have tanked by a huge 490 basis points. All the cost heads have increased at a greater rate than the topline and this has led to the huge decline. While increase in raw material prices could be attributed to commodity price inflation and the company’s inability to pass on the same to end consumers, increase in staff costs is seemingly a result of wage price revision and the commencement of the company’s new plant. Furthermore, margins have also been impacted on account of higher royalties paid to the parent on account of several new products launched.

    cost break up

    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 29,570 36,901 24.8%
    % sales 75.2% 77.6%  
    Staff cost 805 1,112 38.2%
    % sales 2.0% 2.3%  
    Other expenses 3,186 4,887 53.4%
    % sales 8.1% 10.3%  

  • Depreciation charges doubled for the full quarter. 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 to 8 years and 4 years respectively. In that sense, last year’s depreciation numbers are not strictly comparable with that of current year. Notwithstanding the higher depreciation, the company’s bottomline decline at 7% YoY has been better than the 19% YoY decline in operating profits, thanks mainly to strong growth in other income and a lower rise in interest expenses.

What to expect?
At the current price of Rs 656, the stock is trading at a multiple of 5.7 times our estimated FY11 cash flow per share. While the company’s topline growth has come in line with our estimates for the full year, greater than expected decline in operating margins has surprised us. However, we would like to wait for another quarter before we make changes to our margin assumptions. We continue to remain positive on the stock from a 2-3 year perspective.

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