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Maruti: No dents for now!

Oct 27, 2004

Performance Summary
Maruti, India’s largest passenger car manufacturer, has put up a robust 2QFY05 performance. During the quarter, while the topline has grown by 25% YoY, the growth in bottomline is significantly higher at 48% YoY. Improvement in operating margins and savings on the interest front were some of the other highlights. For the half yearly period, the corresponding figures stood at 24% and 45% respectively.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 21,642 27,117 25.3% 42,052 52,266 24.3%
Expenditure 19,436 23,848 22.7% 37,887 46,057 21.6%
Operating profit (EBDITA) 2,206 3,268 48.1% 4,165 6,210 49.1%
EBDITA margin (%) 10.2% 12.1%   9.9% 11.9%  
Other income 1,125 781 -30.5% 1,813 1,796 -0.9%
Interest (net) 106 95 -10.4% 216 186 -13.9%
Depreciation 1,493 1,201 -19.5% 2,307 2,394 3.8%
Profit before tax 1,732 2,754 59.0% 3,455 5,426 57.1%
Extraordinary item - -   - -  
Tax 493 918 86.4% 1,012 1,881 85.8%
Profit after tax/(loss) 1,240 1,836 48.1% 2,443 3,545 45.1%
Net profit margin (%) 5.7% 6.8%   5.8% 6.8%  
No. of shares (m) 288.9 288.9   288.9 288.9  
Diluted earnings per share (Rs)* 17.2  25.4   16.9  24.5  
Price to earnings ratio (x)   14.1     14.6  
(* annualised)            

Background
Maruti Suzuki, incorporated in 1981, is the country's largest passenger car manufacturer with a market share of 60% in FY04 in the domestic market. While Suzuki, Japan holds a 54.2% equity stake in the company, the government of India has brought down its equity stake to 20.8% through two phases of disinvestment. 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. However, 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 2QFY05?
A2 segment leads the pack: Continuity of benign interest rate regime and steady rise in the income levels has enabled the company to post a strong 20% growth in volumes during the quarter. However, unlike previous quarters, the growth was largely powered by offerings in the higher segment viz, the A2 and A3 segments. While the former grew by 74% YoY, the growth in the latter more than doubled, thanks mainly to the price re-positioning strategy adopted by the company. However, this seemed to have little effect on realisations, as the growth in value terms came in a little higher than growth in volumes, indicating a better product mix. Market share of the company climbed to 55%, an improvement of 100 basis points over corresponding quarter last year.

Cars - Performance snapshot
Segment Models 2QFY04 2QFY05 % change 1HFY04 1HFY05 % change
A1 M800 41,921 27,997 -33.2% 82695 59871 -27.6%
C Omni, Versa 14,255 16,142 13.2% 28134 30897 9.8%
A2 Alto, Wagon-R, Zen 37,766 65,684 73.9% 70651 124885 76.8%
A3 Baleno, Esteem 3,716 7,748 108.5% 6848 11823 72.6%
Total passenger cars   97,658 117,571 20.4% 188,328 227,476 20.8%

Lower employee cost benefits: In a quarter where most of the auto companies have struggled to keep margins under check owing to spiraling input costs, the company has actually done the reverse. It has to be remembered that the company, over the past couple of years, has reduced its manpower by more than 2,000. The employee cost has been slashed by close to 40% in the quarter under review.

Cost break-up…
(Rs m) 2QFY04 2QFY05 %Change 1HFY04 1HFY05 %Change
Raw materials 16,271 20,194 24.1% 32,013 39664 23.9%
% sales 75.2% 74.5%   76.1% 75.9%  
Staff cost 646 400 -38.0% 1,235 861 -30.3%
% sales 3.0% 1.5%   2.9% 1.6%  
Other expenses 2,520 3,254 29.2% 4,639 5532 19.3%
% sales 11.6% 12.0%   11.0% 10.6%  

The lower interest cushion: Despite higher tax component to the tune of 86%, the growth in net profits have been significantly higher than the topline growth of 25%. Apart from improvement in operating margins, what have also enabled the company to post a higher bottomline growth is the 10% reduction in interest expense and a lower depreciation charge.

What to expect?
At Rs 358, the stock trades at a P/E multiple of 14.6 times annualised 1HFY05 earnings. With the car demand in the country expected to grow at a fair clip in the medium to long term, the company is expected to be the largest beneficiary of the same owing to its offerings in the small car segment and the biggest distribution network. Having said that, any wrong step taken by the parent, Suzuki, might limit the company’s growth prospects. This may have a impact on valuation as well. Caution needs to be exercised to that extent.


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