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Maruti: Grace in adversity - Views on News from Equitymaster
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Maruti: Grace in adversity
Oct 29, 2007

Performance summary
  • Led by 21% YoY growth in volumes, topline registers a 33% growth during 2QFY08.
  • Operating margins witness a slight contraction of 80 basis points during the quarter, led by huge jump in other expenses

  • Higher other income help offset higher depreciation and interest charges, thus resulting into a bottomline growth of 27% YoY in 2QFY08

  • Company’s bottomline during the first half grows 31% YoY on the back of a similar growth in topline

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
No of units sold 157,683 191,325 21.3% 302,631 360,994 19.3%
Net sales 34,192 45,474 33.0% 65,447 84,782 29.5%
Expenditure 29,436 39,496 34.2% 56,124 73,056 30.2%
Operating profit (EBDITA) 4,756 5,978 25.7% 9,322 11,726 25.8%
EBDITA margin (%) 13.9% 13.1%   14.2% 13.8%  
Other income 1,217 1,885 54.9% 2,650 4,117 55.4%
Interest (net) 31 140 355.5% 63 291 360.2%
Depreciation 596 881 47.8% 1,237 1,703 37.7%
Profit before tax 5,346 6,841 28.0% 10,672 13,848 29.8%
Tax 1,672 2,176 30.2% 3,302 4,187 26.8%
Profit after tax/(loss) 3,674 4,665 27.0% 7,370 9,661 31.1%
Net profit margin (%) 10.7% 10.3%   11.3% 11.4%  
No. of shares (m) 288.9 288.9   288.9 288.9  
Diluted earnings per share (Rs)*         62.0  
Price to earnings ratio (x)         19.0  

What is the company’s business?
Maruti Suzuki, incorporated in 1981, is the country's largest passenger car manufacturer with a domestic market share of 51% in FY07. While Suzuki, Japan holds a 54.2% equity stake in the company, the government of India has completely exited the company through a three-stage divestment process. 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 2QFY08?
All conquering sales: The company ruled over the industry during the quarter. Its dominance could be gauged from the fact that it managed to outperform the industry growth rate not only in passenger cars but also passenger vehicles (includes UVs and MUVs) and exports. ‘SX4’, the company’s latest offering in the C segment and the one which enabled it to plug a big gap in its product portfolio, continued to rake in good numbers and once again, enabled its ‘A3’ portfolio to grow by an impressive 68% YoY during the quarter. Launch of a brand new ‘Vitara’ also seems to have helped its MUV sales, where growth stood at 71% YoY.

The ‘A2’ segment from where the company derives nearly 2/3rd of all its volumes also recorded a robust growth of 23% YoY during the quarter. Using its strong marketing and distribution muscle to good effect, the company has yet again managed to beat the slowdown in the passenger car industry and has recorded a combined growth of 18% YoY in domestic sales during the quarter. Infact, absent the company, industry volumes would have grown by a mere 6% as opposed to the current 13% growth during 1HFY08. The difference was even more glaring on the exports front, where company’s exports grew 51% YoY as against the industry growth rate of a mere 2% YoY in the first half of FY08. However, while we remain positive on the company’s long-term volume growth prospects, outperformance of the magnitude as was witnessed in the first half is unlikely to repeat itself consistently as quite a few launches by rivals are on the anvil. Growth in topline in value terms during the quarter has come in at 33% YoY, mainly due to stronger sales of high value products like ‘SX4’ and MUVs.

sales break up
Segment 2QFY07 2QFY08 (% change) 1HFY07 1HFY08 (% change)
A1 20,145 16,671 -17.2% 40,445 34,665 -14.3%
C 20,523 21,453 4.5% 37,332 42,084 12.7%
A2 99,747 122,689 23.0% 191,197 233,102 21.9%
A3 8,389 14,118 68.3% 15,960 25,174 57.7%
Total Passenger cars 148,804 174,931 17.6% 284,934 335,025 17.6%
MUV 714 1,223 71.3% 1,688 1,733 2.7%
Total domestic 149,518 176,154 17.8% 286,622 336,758 17.5%
Export 8,165 15,171 85.8% 16,009 24,236 51.4%
Total Sales 157,683 191,325 21.3% 302,631 360,994 19.3%

Margins stable: Maruti’s operating margins during the quarter has suffered a marginal fall of 80 basis points and this despite the fact that raw material costs, which account for more than 70% of the total revenues, have come down as a percentage of sales. The main culprit has been other expenses, where a huge jump of 86% on a YoY basis was witnessed. While the exact break-up is not given, we believe that the costs associated with new launches seemed to have taken a toll on the other expenses of the company during the quarter.

cost break up
(Rs m) 2QFY07 2QFY08 Change
Raw materials 25,570 32,734 28.0%
% sales 74.8% 72.0%  
Staff cost 714 909 27.4%
% sales 2.1% 2.0%  
Other expenses 3,152 5,853 85.7%
% sales 9.2% 12.9%  

The company’s bottomline growth at 27% YoY came in at a higher rate than the growth in operating profits. This could be attributed to the significant jump in other income, which grew 55% YoY. However, excluding the other income, the bottomline growth stands at a lower 13% YoY, impacted by higher interest and depreciation. The growth in the latter is on account of higher charges due to the commencement of operations at its new plant.

Over the last few quarters: As seen from the table below, buoyed by new launches of high value products, Maruti’s topline performance has been on an upswing over the past couple of quarters. At the same time, the company has also done well to maintain its margins. This consistency in performance, even when the external environment has not been very favorable in recent times, lends a great deal of comfort vis-à-vis the long-term outlook of the company.

over the last few quarters
  2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Sales growth (% YoY) 12.6% 18.2% 35.2% 25.8% 33.0%
OPM 13.9% 13.8% 12.4% 14.6% 13.1%
NPM 10.7% 10.2% 10.1% 12.7% 10.3%

What to expect?
At the current price of Rs 1,180, the stock is trading at a multiple of 12.7 times our estimated FY10 cash flow. We had given a ‘BUY’ on the stock in March 2007 from a March 2009 perspective. But helped by the current bullrun and the company’s own strong performance, the stock has already breached its market price and we would soon come out with our current view on the stock post the management con call scheduled later today.

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