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Maruti: New launches paying off - Views on News from Equitymaster
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Maruti: New launches paying off
Jul 26, 2007

Performance summary
  • Led by 17% YoY growth in volumes, topline registers a 26% YoY growth during 1QFY08.

  • Operating margins remain stable as expenses grow in line with revenues

  • Higher other income and lower tax outgo leads to expansion at the net profit margin level and a bottomline growth of 35% YoY.

(Rs m) 1QFY07 1QFY08 Change
No of units sold 144,948 169,669 17.1%
Net sales 31,255 39,308 25.8%
Expenditure 26,689 33,560 25.7%
Operating profit (EBDITA) 4,566 5,748 25.9%
EBDITA margin (%) 14.6% 14.6%  
Other income 1,433 2,233 55.8%
Interest (net) (33) (151) 364.6%
Depreciation 641 822 28.3%
Profit before tax 5,326 7,007 31.6%
Extraordinary income/(expense) - -  
Tax 1,630 2,011 23.4%
Profit after tax/(loss) 3,696 4,996 35.2%
Net profit margin (%) 11.8% 12.7%  
No. of shares (m) 288.9 288.9  
Diluted earnings per share (Rs)* 51.2 69.2  
Price to earnings ratio (x)**   14.5  

What is the company’s business?
Maruti Suzuki, incorporated in 1981, is the country's largest passenger car manufacturer with a domestic market share of 51% in FY07. While Suzuki, Japan holds a 54.2% equity stake in the company, the government of India has completely exited the company through a three-stage divestment process. 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. However, 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 1QFY08?
The SX4 kicker: Notwithstanding the looming interest rates and slowdown fears, the company sold 17% more vehicles than it managed same quarter last year. This was significantly higher than the industry growth rate of 10% and could be attributed to the company’s strategy of continuously trying to tap new segments. While it launched ‘Swift Diesel’ last fiscal to enter into the fast growing diesel car segment, it launched ‘SX4’ in the A3 segment in the current fiscal. Both the moves seem to be paying dividends as these launches helped the company grow its A2 and A3 segments by 21% and 46% YoY respectively. Further, with the company trying to tap new markets for exports, growth here at 16% YoY also remained healthy. The topline growth of 26% YoY came in higher than the growth in volumes as the company sold greater number of high value cars like the ‘SX4’ as compared to corresponding previous quarter.

sales break up
Segment 1QFY07 1QFY08 (% change)
A1 20,300 17,994 -11.4%
C 16,809 20,631 22.7%
A2 91,450 110,413 20.7%
A3 7,571 11,056 46.0%
Total Passenger cars 136,130 160,094 17.6%
MUV 974 510 -47.6%
Total domestic 137,104 160,604 17.1%
Export 7,844 9,065 15.6%
Total Sales 144,948 169,669 17.1%

Margins stable: Maruti has not only outperformed its two-wheeler peers on the volume front, but has also posted better margins. Despite rising prices of commodities, the company has done well to keep costs under check as margins remained stable during the quarter. However, any significant improvement from the current levels might be difficult to come by, owing to the high degree of localisation for its new models right from the start.

cost break up
(Rs m) 1QFY07 1QFY08 Change
Raw materials 23,595 29,570 25.3%
% sales 75.5% 75.2%  
Staff cost 626 805 28.6%
% sales 2.0% 2.0%  
Other expenses 2,468 3,186 29.1%
% sales 7.9% 8.1%  

The company’s bottomline growth at 35% YoY came in at a higher rate than the growth in topline. This could be attributed to the significant jump in other income, which grew 56% YoY. The company also paid taxes at a slightly lower tax rate than previous quarter and this too helped boost the bottomline growth. However, excluding the other income, the bottomline growth stands at a lower 22% YoY, impacted by higher interest and depreciation. The growth in the latter is on account of higher charges due to the commencement of operations at its new plant.

Over the last few quarters
As seen from the table below, buoyed by new launches, Maruti’s topline performance has been on an upswing over the past couple of quarters. At the same time, the company has also done well to maintain its margins. This consistency in performance, even when the external environment has not been very favorable in recent times, lends a great deal of comfort vis-à-vis the long-term outlook of the company.

over the last few quarters
  1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
Sales growth (% YoY) 19.0% 12.6% 18.2% 35.2% 25.8%
OPM 14.6% 13.9% 13.8% 12.4% 14.6%
NPM 11.8% 10.7% 10.2% 10.1% 12.7%

What to expect?
At the current price of Rs 840, the stock is trading at a multiple of 8.9 times our estimated FY10 cash flow. Notwithstanding a few blips, we believe that the long-term outlook of the Indian car industry is indeed favorable and we expect Maruti to be a leading beneficiary of the same. We remain positive on the company’s performance over the medium to long term.

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