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Maruti: A truly 'Ritz'y performance - Views on News from Equitymaster
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Maruti: A truly 'Ritz'y performance
Oct 24, 2009

Performance summary
  • Topline grows by a strong 44% YoY during the quarter on the back of a 30% growth in volumes
  • A strong 240 basis points improvement in margins leads to 78% growth in operating profits
  • Modest depreciation charges and lower interest outgo add to the buoyancy, leading to an impressive 93% growth in bottomline during the quarter
  • Half yearly bottomline grows by 51% YoY on the back of a 39% YoY growth in topline


(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Volume sales 189,451 246,188 29.9% 382,035 472,917 23.8%
Net sales 49,936 72,026 44.2% 98,222 136,956 39.4%
Expenditure 44,779 62,865 40.4% 87,362 119,863 37.2%
Operating profit (EBDITA) 5,157 9,161 77.6% 10,860 17,093 57.4%
EBDITA margin (%) 10.3% 12.7%   11.1% 12.5%  
Other income 960 1,100 14.5% 3,182 3,265 2.6%
Interest (net) 208 60 -71.3% 376 123 -67.3%
Depreciation 1,658 2,031 22.5% 3,319 3,992 20.3%
Profit before tax 4,251 8,171 92.2% 10,347 16,244 57.0%
Extraordinary inc/(exp) - -   - -  
Tax 1,290 2,471 91.5% 2,727 4,708 72.6%
Profit after tax/(loss) 2,961 5,700 92.5% 7,620 11,535 51.4%
Net profit margin (%) 5.9% 7.9%   7.8% 8.4%  
No. of shares (m) 288.9 288.9   288.9 288.9  
Diluted earnings per share (Rs)*         55.7  
Price to earnings ratio (x)*         27.3  

What has driven performance in 2QFY10?
  • Successful new launches and a favorable macroeconomic environment have combined to lead to yet another exciting quarter for Maruti. To elaborate on the latter, favourable conditions like the government’s stimulus package, buoyant semi-urban markets, low interest rates, improved financing by banks, low inflation and low oil prices have helped the company clock good numbers in the domestic market.

  • During the quarter, domestic volumes came in higher by 22% YoY, receiving help from new launches like the refreshed Estilo, A-Star and Ritz. The A-2 segment, where these models belong to forms more than 70% of the total domestic sales of the company and the same grew by nearly 30%. This explains most of the domestic volume growth. Other segments like the A-3 and the C segment also did well, growing by 29% and 10% respectively on a YoY basis.

  • Exports also continued with its stellar performance, growing by nearly 110% during the quarter as the company commenced exports of A-Star to Latin America and South Africa, besides the traditional markets of Europe and Asia.

  • Besides significantly higher volumes, higher average realisations per car sold helped Maruti post a robust 44% growth in revenues during the quarter.

  • The company's domestic market share amongst passenger cars moved from 54.2% to 54.9% during the quarter, with share in the A3 segment touching 37.9 per cent, a gain of 7.9 percentage points.

    Sales break up...
    Segment 2QFY09 2QFY10 (% change) 1HFY09 1HFY10 (% change)
    A1 12,137 8,737 -28.0% 28,786 15,856 -44.9%
    C 20,209 22,200 9.9% 40,970 44,433 8.5%
    A2 118,083 153,096 29.7% 243,510 299,829 23.1%
    A3 18,849 24,278 28.8% 34,789 44,225 27.1%
    Total Passenger cars 169,278 208,311 23.1% 348,055 404,343 16.2%
    MUV 2,428 772 -68.2% 3,744 2,155 -42.4%
    Total domestic 171,706 209,083 21.8% 351,799 406,498 15.5%
    Export 17,745 37,105 109.1% 30,236 66,419 119.7%
    Total Sales 189,451 246,188 29.9% 382,035 472,917 23.8%

  • On the costs front, a sharp drop in other expenses as a percent of sales played a key role in helping expand the operating margins of the company during the quarter by more than 2.4% and bring about a strong 78% growth in operating profits. The two major cost heads that the company was able to bring a significant change in were material costs and selling and distribution expenses as the same benefited from reduced raw material prices and higher economies of scale.

    The costs side...
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Raw materials 38,100 54,555 43.2% 75,001 104,106 38.8%
    % sales 76.3% 75.7%   76.4% 76.0%  
    Staff cost 1,165 1,263 8.4% 2,276 2,598 14.1%
    % sales 2.3% 1.8%   2.3% 1.9%  
    Other expenses 5,514 7,047 27.8% 10,085 13,159 30.5%
    % sales 11.0% 9.8%   10.3% 9.6%  

  • With interest costs falling by 71% and with depreciation charges increasing at a much lower rate, the company’s net profits received a further fillip. These managed to grow by 93% YoY during the quarter. The company’s tax rates have remained virtually unchanged. Half yearly bottomline growth has come in at 51% YoY with the second quarter contributing nearly 90% of it.

What to expect?
At the current price of Rs 1,531, the stock trades at a multiple of 24 times our estimated FY12 earnings. In hindsight, we now believe that our ‘Sell’ call on the company came a bit too early. While the investors who would have acted on both our ‘Buy’ call earlier and the most recent ‘Sell’ call must have come out with very healthy returns, they’ve also missed the nearly 50% surge that has happened post our ‘Sell’ recommendation. Frankly speaking, company’s growth in volumes and operating margins improved way beyond our expectations, especially the former. However, we would also like to add that the current buoyancy in volumes may be difficult for the company to maintain in the medium term. The growth should revert to the long-term average of 10%-12%. Thus, taking this into account and the current high valuations, we advise investors to exercise caution.

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