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Maruti Suzuki: Top down, bottom up - Views on News from Equitymaster
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Maruti Suzuki: Top down, bottom up
Jul 26, 2013

Maruti Suzuki announced its results for the first quarter ended June 2013 recently. The company reported a 5% YoY drop in sales but a 49% YoY growth net profits. Here is our analysis of the results.

Performance summary
  • Net sales fall by 5% YoY on account of the 10% YoY drop in volumes and the overall slowdown in the auto industry.
  • Operating profits rise by a robust 48% YoY as margins improve by 4.1% YoY to 11.4% in 1QFY14. The same is due to lower raw material costs (as a percentage of sales).
  • Net profits surge by 49% YoY led by the healthy performance at the operating level.

Financial performance: A snapshot
(Rs m) 1QFY13 1QFY14 Change
Total Vehicles Sold (No.) 295,896 266,434 -10.0%
Net sales 107,782 102,373 -5.0%
Expenditure 99,918 90,712 -9.2%
Operating profit (EBDITA) 7,864 11,662 48.3%
EBDITA margin (%) 7.3% 11.4%  
Other income 1,123 2,043 81.9%
Finance costs 332 442 33.1%
Depreciation 3,399 4,802 41.3%
Profit before tax 5,255 8,461 61.0%
Tax 1,018 2,145 110.7%
Profit after tax/(loss) 4,238 6,316 49.0%
Net profit margin (%) 3.9% 6.2%  
No. of shares (m)   302.1  
Diluted earnings per share (Rs)*   86.1  
Price to earnings ratio (x)*   16.0  
(* On a trailing 12-month basis)
What has driven performance in 1QFY14?
  • Maruti Suzuki's revenues during the quarter fell by 5% YoY on the back of the 10% YoY drop in volumes. The fall in volumes was more pronounced in the compact segment, vans and multi utility vehicles (MUVs). Volumes for these had declined by 18% YoY, 19% YoY and 23% YoY respectively. In terms of geographies, volumes in the domestic market fell by 7% YoY, while the decline was quite step in the case of exports (down 35% YoY). FY13 had seen a considerable surge in diesel vehicles due to the considerable difference between petrol and diesel prices as the former became more market determined. However, this trend was not witnessed this quarter. Indeed, the management pointed to the fact that during 1QFY14, volumes of diesel vehicles also witnessed a decline. This is because of the hike in diesel prices and the fact that a possible further hike here cannot be ruled out.

  • Maruti's operating margins improved by 4.1% to 11.4% in 1QFY14 on account of a fall in raw material costs (as percentage of sales). It must be noted that Maruti Suzuki had merged Powertrain with itself in FY13. In this regard, while the 1QFY14 results reflect the merger, the 1QFY13 results do not. Consequently, the merger also played a part in terms of influencing margins this quarter. Thus, raw material costs as a percentage of sales fell on re-distribution of expenses on account of the merger, cost reduction efforts and a favourable impact of foreign exchange. On the other hand, staff costs (as percentage of sales) increased on account of the merger effect and increase in the number of employees. The merger also led to an increase in other expenditure which rose by 1% to 13.8% of sales in 1QFY14.

    Cost break-up...
    (Rs m) 1QFY13 1QFY14 Change
    Raw materials/ purchases 83,903 73,656 -12.2%
    % sales 77.8% 71.9%  
    Staff cost 2,268 2,951 30.1%
    % sales 2.1% 2.9%  
    Other expenditure 13,747 14,105 2.6%
    % sales 12.8% 13.8%  
    Total expenditure 99,918 90,712 -9.2%

  • Led by the healthy performance at the operating profit level, net profits surged by 49% YoY during the quarter despite the rise in tax expenses.
What to expect?
At the current price of Rs 1,375, the stock trades at a multiple of 8.7 times our estimated FY15 cash flow per share. As has been evident from the 1QFY14 performance, the second quarter is likely to face headwinds as well, post which things should improve assuming good monsoons and the festival season leads to a pickup in demand. Since petrol vehicles have been facing subdued demand for quite some time now, the management expects volumes of diesel cars to fall faster in the coming months given the hike in the prices of diesel. Despite pressures in the near term, the management remains confident of growth prospects from a longer term perspective on the back of thrust on infrastructure and rising disposable incomes. As far as valuations are concerned, our view is that investors do not buy the stock at current levels.

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