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Maruti: Higher costs put pressure

Aug 1, 2012

Maruti Suzuki announced its results for the quarter ended June 2012 recently. The company reported a 28% YoY increase in revenues, while profits declined by 23% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 28% YoY during the quarter led by higher volumes (up 5.1% YoY) as well as a change in product mix.
  • Operating profits decline by 3% YoY as margins contract by 2.3% YoY to 7.3%. The same is due to higher employee and other expenses (as a percentage of sales).
  • Net profits decline by 23% YoY on account of lower operating profits coupled with higher interest and depreciation charges as well as lower other income.

Financial performance: A snapshot
(Rs m) 1QFY12 1QFY13 Change
Total Vehicles Sold (No.) 281,526 295,896 5.1%
Net sales 84,541 107,782 27.5%
Expenditure 76,437 99,919 30.7%
Operating profit (EBDITA) 8,104 7,863 -3.0%
EBDITA margin (%) 9.6% 7.3%  
Other income 1,841 1,123 -39.0%
Finance costs 58 332 476.5%
Depreciation 2,425 3,399 40.2%
Exceptional items - -  
Profit before tax 7,462 5,255 -29.6%
Tax 1,970 1,018 -48.3%
Profit after tax/(loss) 5,492 4,238 -22.8%
Net profit margin (%) 6.5% 3.9%  
No. of shares (m)   288.9  
Diluted earnings per share (Rs)*   52.3  
Price to earnings ratio (x)*   21.5  
*12 months trailing earning

What has driven performance in 1QFY13?
  • Maruti Suzuki's (Maruti) revenue growth was led by a change in product mix, apart from the 5% YoY increase in volumes. Contribution from the company's A3 (which includes models such as Dzire and Sx4) segment increased as a percentage of sales as compared to the A2 segment (which includes the company's compact cars) whose share declined to 62% from about 68% last year. Also, the company's B segment (Gypsy, Grand Vitara, Ertiga) contributed to about 7% of the total domestic volumes as compared to 0.6% during 1QFY12. Geography wise, domestic sales grew by 5% and contributed to about 89% of volumes (same as last year), with the exports contributing the balance.

  • Maruti's operating margins declined to 7.3% from 9.6% earlier. This was largely due to higher other expenses, which includes royalty (higher on account of exchange rates fluctuations), power and fuel, amongst others.

    Cost break-up...
    (Rs m) 1QFY12 1QFY13 Change
    Raw materials/ purchases 65,977 83,903 27.2%
    % sales 78.0% 77.8%  
    Staff cost 1,794 2,383 32.8%
    % sales 2.1% 2.2%  
    Other expenditure 8,666 13,633 57.3%
    % sales 10.3% 12.6%  
    Total expenditure 76,437 99,919 30.7%
    Data Source: Equitymaster Research, company

  • Maruti's profits declined by 23% YoY on account of a poor operating performance, coupled with lower other income and higher interest & depreciation charges. Had it not been for the lower tax outgo, the company's profits would have fallen even more.

What to expect?
At the current price of Rs 1,122, the stock trades at a multiple of 7.3 times our estimated FY15 cash flow per share and at 12.3 times our estimated earnings per share. Maruti's performance in FY12 was impacted by the slowdown in the overall auto industry and labour troubles at Manesar which severely impacted production and thereby growth. There has not been an end to the company's Manesar troubles and the recent riots at the site are testimony to the fact. With a lockout being declared at the plant, there is uncertainty as to when production will resume there. This is bound to have a major impact on the company's performance in the near term given that its models Swift and Dzire (both of which have been doing very well) are manufactured at the Manesar plant. The slowdown in the auto sector has only piled on the pressure.

Having said that, from a longer term perspective the robust growth in the Indian economy, thrust on infrastructure and rising disposable incomes is expected to spur the growth in Maruti's sales volumes. The company also stands to benefit on the back of its strong reach, relatively affordable products and strong brand and after sales services. After factoring in the FY15 estimates, we have a 'Hold' view on the stock.

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Jun 25, 2021 12:43 PM


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