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Maruti: Margin pressure - Views on News from Equitymaster

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Maruti: Margin pressure
Oct 24, 2008

Performance summary
  • Topline grows by 10% YoY during 2QFY09 despite sluggish volumes

  • A 280 (2.8%) basis points fall in operating margins leads to a 14% YoY decline in operating profits during the quarter

  • Bottomline declines by 37% YoY led by lower margins as well as higher depreciation and lower other income

  • Half yearly profits fall 21% YoY on the back of a 15% YoY growth in topline



(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
No of units sold 191,325 189,451 -1.0% 360,994 382,035 5.8%
Net sales 45,474 49,936 9.8% 84,782 97,472 15.0%
Expenditure 39,496 44,779 13.4% 73,056 87,679 20.0%
Operating profit (EBDITA) 5,978 5,157 -13.7% 11,726 9,794 -16.5%
EBDITA margin (%) 13.1% 10.3%   13.8% 10.0%  
Other income 1,885 960 -49.0% 4,117 4,248 3.2%
Interest (net) 140 208 48.0% 291 376 29.1%
Depreciation 881 1,658 88.2% 1,703 3,319 94.9%
Profit before tax 6,841 4,251 -37.9% 13,848 10,347 -25.3%
Tax 2,176 1,290 -40.7% 4,187 2,727 -34.9%
Profit after tax/(loss) 4,665 2,961 -36.5% 9,661 7,620 -21.1%
Net profit margin (%) 10.3% 5.9%   11.4% 7.8%  
No. of shares (m) 288.9 288.9   288.9 288.9  
Diluted earnings per share (Rs)*         52.8  
Price to earnings ratio (x)*         10.0  

What has driven performance in 2QFY09?
  • With a substantial portion of Maruti’s target customer base deferring car purchases on account of higher interest rates, the company’s volumes took a hit and suffered a de-growth of 1% during 2QFY09 on a YoY basis. Sales in value terms however, came higher by 10% YoY. This was a consequence of both higher realisations as well as better product mix. Growth in the high value ‘A3’ (Dzire, SX4) segment came in at strong 34% YoY and this played a key role in shoring up topline growth during the quarter. Exports also grew strongly, registering a 17% YoY growth. All the other divisions suffered de-growth during the quarter, with ‘A1’ (Maruti 800) being the worst hit, declining as much as 27% on a YoY basis.

    The costs side…
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw materials 32,734 36,341 11.0% 62,304 71,470 14.7%
    % sales 72.0% 72.8%   73.5% 73.3%  
    Staff cost 909 1,165 28.1% 1,714 2,276 32.8%
    % sales 2.0% 2.3%   2.0% 2.3%  
    Other expenses 5,853 7,273 24.3% 9,038 13,932 54.1%
    % sales 12.9% 14.6%   10.7% 14.3%  

  • Operating margins continued to head southwards, suffering an erosion of as much as 2.8% YoY during the quarter. All the major cost heads increased as percentage of sales, with other expenses exerting the maximum pressure. Rise in other expenses on the other hand seem to be mainly due to greater marketing as well as distribution effort and higher royalty payments.

  • Besides lower margins, lower other income as well as higher depreciation and interest expenses have further impacted the bottomline, resulting in a 37% YoY decline during the quarter.

What to expect?
At the current price of Rs 525, the stock trades at a multiple of 4.6 times our estimated FY11 cash flow per share. Given the persistent weakness in the company’s operating margins, which we believe is more out of structural reasons than cyclical, we will have to lower our current as well as future margin assumptions. With the overall profits of the company fairly sensitive to the same, there could be a downward revision to our target price as well. We will soon update our research report on the company.

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