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Maruti: A smooth ride for now… - Views on News from Equitymaster
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Maruti: A smooth ride for now…
Jul 27, 2006

Performance summary
Maruti, a proxy for India’s passenger car industry, has come up with yet another praiseworthy performance during 1QFY07. Registering improvement on all the fronts, net profits have improved by 63% YoY on the back of a 19% growth in topline. Operating margins have expanded by 220 basis points while interest costs have been pruned by 64%. Other income has also grown at a healthy rate of 46%.

Financial performance: Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
No of units sold 121,866 144,948 18.9%
Net sales 26,271 31,255 19.0%
Expenditure 23,024 26,689 15.9%
Operating profit (EBDITA) 3,248 4,566 40.6%
EBDITA margin (%) 12.4% 14.6%  
Other income 982 1,433 45.9%
Interest (net) (91) (33) -64.4%
Depreciation 783 641 -18.2%
Profit before tax 3,356 5,326 58.7%
Extraordinary income/(expense) - -  
Tax 1,091 1,630 49.4%
Profit after tax/(loss) 2,265 3,696 63.2%
Net profit margin (%) 8.6% 11.8%  
No. of shares (m) 288.9 288.9  
Diluted earnings per share (Rs)* 31.4 51.2  
Price to earnings ratio (x)**   17.0  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Maruti Udyog Ltd (MUL), incorporated in 1981, is India's largest passenger car manufacturer with a market share of around 50% (FY05) of the domestic car market. Suzuki (Japan) holds a 54.2% equity stake in the company. 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 on a consistent basis. However, of late, 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 1QFY07?
Its the A2 segment again: After growing at a rather sedate 8% during FY06, passenger car industry volumes gained momentum in 1QFY07 and have risen by 24% as compared to same quarter last year. Maruti has underperformed the industry and has grown at a lower rate of 20% during the same period. Its A2 segment offerings, which comprises the Alto, Wagon R, Zen and Swift grew by 25% and largely propelled the company’s growth during the quarter. It, however, failed to prevent the fall in the company’s market share during the quarter. The underperformance could be a result of the launch of the petrol version of a popular diesel car of a rival.

We have mentioned before that by being the hottest segment in the Indian passenger car industry, the A2 segment will be increasingly targeted by rivals and Maruti will find it hard to retain market share in this segment. Also, the 19% growth in value terms, which is in line with volume growth, gives an indication of how tough it is becoming to increase prices despite pressure on the input costs front.

Among its other offerings, while the ‘Segment C’ car sales grew by a decent 14%, A3 segment also performed admirably (up 12% YoY). Exports were also up by 14% as compared to same quarter last year.

Sales break up..
Segment Model 1QFY06 1QFY07 (% change)
A1 Maruti 800 19,413 20,300 4.6%
C Omni, Versa 14,765 16,809 13.8%
A2 Alto, WagonR, Zen, Swift 73,013 91,450 25.3%
A3 Baleno, Esteem 6,758 7,571 12.0%
Total Passenger cars   113,949 136,130 19.5%
MUV Gypsy, Vitara 1,024 974 -4.9%
Total domestic   114,973 137,104 19.2%
Export   6,893 7,844 13.8%
Total Sales   121,866 144,948 18.9%

‘Next leap’ seems to be making a difference: An auto company with a Japanese legacy is bound to be ruthless in cost cutting and Maruti seems to living up to those expectations. Thanks to its ‘next leap’ programme of productivity improvement, the company has been able to expand its operating margins by a good 220 basis points. Raw material cost as a percentage of sales have decline by 240 basis points and this has largely aided in margin improvement.

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 20,459 23,595 15.30%
% sales 77.90% 75.50%  
Staff cost 561 626 11.70%
% sales 2.10% 2.00%  
Other expenses 2,005 2,468 23.10%
% sales 7.60% 7.90%  

Prudent capital management further adds to bottomline growth: Volume growth has resulted in cash registers jingling for the company and as a consequence, it has not only had to rely less on borrowed capital but also been able to earn higher returns on its invested funds. This is evident from the 64% decline in the interest cost of the company and a 46% jump in other income.

What to expect?
The stock is currently trading at Rs 783, implying a price to cash flow of 11 times its estimated FY08 earnings. While the prospects look attractive from a near to medium term in view of its new diesel plant and tie up with Nissan, competition is likely to escalate resulting in price wars and longer pay back period over the longer term.

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