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Maruti: A better 'Alto'native

Jul 26, 2004

Introduction to results
Maruti, the country's largest carmaker has sped past the 1QFY05 flagpost with even greater acceleration. While the topline of the company has grown at 24% YoY, the bottomline has grown at a higher rate of 42%, thanks largely to improvement in operating margins and reduction in interest expenses.

(Rs m) 1QFY04 1QFY05 Change
Volumes sold (units) 1,04,017 1,23,624 18.8%
Net sales 20,331 25,150 23.7%
Other income 748 1,015 35.7%
Expenditure 18,432 22,208 20.5%
Operating profit (EBDITA) 1,900 2,942 54.9%
Operating profit margin (%) 9.3% 11.7%
Interest 110 91 -17.3%
Depreciation 815 1,193 46.5%
Profit before tax 1,722 2,672 55.1%
Extraordinary items - - -
Tax 519 963 85.4%
Profit after tax/(loss) 1,203 1,709 42.1%
Net profit margin (%) 5.9% 6.8%  
No. of shares (m) 288.9 288.9  
Diluted earnings per share (Rs)* 16.7 23.7  
P/E (x)   18.3  
(* annualised)      

What is the company's business?
Maruti is the country's largest passenger car manufacturer with a market share of 60% in FY04 in the domestic market. After remaining a near monopoly till 1992, the entry of other multinationals and the emergence of domestic competition has resulted in the company losing market share. However, the company has been able to steady its share in the Indian passenger car segment through aggressive price led strategies and new product introductions.

What has driven performance in 1QFY05?
Sales: Volume sales were higher by 19% as compared to the same quarter last year. Although sales of Maruti 800, the company's bread and butter model, declined by 22%, it was more than compensated by a robust 80% growth in A2 segment offerings such as Alto, Wagon R and Zen. It should be remembered that in order to plug the price gap between Maruti 800 and its next offerings in the A2 segment, the company had slashed the prices of Alto significantly few months ago. The strategy seems to have paid off, as the model was successful in displacing Maruti 800 off the top spot in terms of volume sales, a position the latter had successfully defended for the past 20 years. Sales of its A3 segment offerings were also higher by 30%. Exports however turned in a lackluster performance as the volumes declined by 2%. Lack of growth in the target markets led to poor show on the exports front.

Cars - Performance snapshot
Segment Models 1QFY04 1QFY05 % change
A1 M800 40,774 31,874 -21.8%
C Omni, Versa 13,879 14,755 6.3%
A2 Alto, Wagon-R, Zen 32,885 59,201 80.0%
A3 Baleno, Esteem 3,132 4,075 30.1%
Total passenger cars 90,670 109,905 21.2%
MUV Gypsy,Vitara 851 1,479 73.8%
Domestic   91,521 111,384 21.7%
Export   12,496 12,240 -2.0%
Total   104,017 123,624 18.8%

Operating margin: Improved product mix and savings on the cost front has seen the company's operating margins improve by a strong 240 basis points during the quarter. In the last fiscal, the company had come out with a VRS package and this seems to have benefited the company as is evident from a lower wage bill in the table below. Other expenses have also shown a decline as compared to the same quarter last year.

Cost break-up
(Rs m) 1QFY04 1QFY05 Change
Raw materials 15,783 19,470 23.4%
% sales 77.6% 77.4%
Staff cost 589 461 -21.8%
% sales 2.9% 1.8%  
Other expenses 2,059 2,278 10.6%
% sales 10.1% 9.1%  

Net profits: Besides improved operating performance, higher other income has also enabled the company to post a strong 42% bottomline growth. Infact, had it not been for the higher depreciation and a steep rise in tax outgo, the bottomline of the company would have looked even better.

What to expect?
The stock is currently trading at Rs 432, implying a P/E of 18x annualised 1QFY05 earnings. The long term prospects of the company look attractive in light of strong growth expected in the Indian automobile market and the company's leadership position in the A2 segment, which account for the bulk of the passenger cars sold in the country. Besides, in order to tap the diesel car market, the company has started work on a l,00,000 per annum diesel engine plant and this will help it to further augment growth. In the near term however there are concerns such as interest rate hikes, rise in fuel prices and deficient monsoons. To that extent, the risk return ratio looks skewed towards risks in the short-term.

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