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Maruti Suzuki: Profits rise threefold - Views on News from Equitymaster

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Maruti Suzuki: Profits rise threefold

Oct 30, 2013

Maruti Suzuki announced its results for the second quarter ended September 2013 recently. The company reported a 26% YoY growth in sales and stupendous 195% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 26% YoY led by the 20% YoY growth in volumes.
  • Operating profits rise by a robust 160% YoY as margins double to 12.6% in 2QFY14. The same is due to substantially lower raw material costs (as a percentage of sales).
  • Net profits surge by 195% YoY led by the healthy performance at the operating level.

Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Total Vehicles Sold (No.) 230,376 275,586 19.6% 526,272 542,020 3.0%
Net sales 83,054 104,681 26.0% 190,836 207,054 8.5%
Expenditure 77,969 91,466 17.3% 177,448 182,178 2.7%
Operating profit (EBDITA) 5,086 13,214 159.8% 13,388 24,876 85.8%
EBDITA margin (%) 6.1% 12.6%   7.0% 12.0%  
Other income 1,563 1,010 -35.4% 2,248 3,053 35.8%
Finance costs 380 434 14.2% 713 876 23.0%
Depreciation 3,470 4,992 43.8% 6,870 9,793 42.6%
Profit before tax 2,798 8,799 214.4% 8,054 17,260 114.3%
Tax 524 2,097 300.3% 1,541 4,241 175.2%
Profit after tax/(loss) 2,275 6,702 194.7% 6,512 13,018 99.9%
Net profit margin (%) 2.7% 6.4%   3.4% 6.3%  
No. of shares (m)         302.1  
Diluted earnings per share (Rs)*         86.1  
Price to earnings ratio (x)*         18.9  
(* On a trailing 12-month basis)

What has driven performance in 2QFY14?
  • Maruti Suzuki's revenues during the quarter grew by a robust 26% YoY on the back of the 20% YoY growth in volumes. Having said that, 2QFY13 was the quarter in which there were disruptions in the company's production on account of the riots at its plant in Manesar. Thus, part of the growth was on account of the low base effect last year. Growth in volumes was more pronounced in the compact and super compact segments. Volumes for both these segments were up 31.5% YoY and 74% YoY respectively. However, vans and multi utility vehicles (MUVs) saw volumes fall considerably by 22% YoY and 45% YoY respectively. In terms of geographies, volumes in the domestic market were up 15% YoY, while exports put up a strong show (volumes were up by an impressive 67% YoY).

  • Maruti's operating margins doubled to 12.6% in 2QFY14 on account of a substantial fall in raw material costs (as percentage of sales). Raw material costs fell from 79.6% of sales in 2QFY13 to 69.4% in 2QFY14. Maruti's increasing focus on localization has been yielding results. The company also benefited from a favourable impact of foreign exchange. According to the management, there were savings on the dollar-yen exchange rate as well as on the dollar-rupee on exports. There was also the impact of the vendor's compensation which is paid with a quarter lag. All these played a role in bolstering margins. On the other hand, staff costs (as percentage of sales) increased on account of annual increments and increase in the number of employees.

    Cost break-up...
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Raw materials/ purchases 66,110 72,644 9.9% 150,012 146,300 -2.5%
    % sales 79.6% 69.4%   78.6% 70.7%  
    Staff cost 2,242 3,723 66.1% 4,510 6,674 48.0%
    % sales 2.7% 3.6%   2.4% 3.2%  
    Other expenditure 9,617 15,099 57.0% 22,925 29,204 27.4%
    % sales 11.6% 14.4%   12.0% 14.1%  
    Total expenditure 77,969 91,466 17.3% 177,448 182,178 2.7%

  • Led by the healthy performance at the operating profit level, net profits surged by 195% YoY during the quarter despite the surge in tax expenses.
What to expect?
At the current price of Rs 1,631, the stock trades at a multiple of 8.4 times our estimated FY16 cash flow per share. Although the festive season so far has been good, the management has stated that economic uncertainty still remains with no clear visibility on how the second half of the fiscal will turn out to be. With the third plant running at Manesar, depreciation charges are expected to inch upwards going forward. Having said that, the company is focusing on various cost reduction efforts to keep things under control. One of these measures is to reduce the import content by about 2-2.5% every year and focus more on localization. Despite pressures in the near term, the management remains confident of growth prospects from a longer term perspective on the back of thrust on infrastructure and rising disposable incomes. As far as valuations are concerned, our view is that investors do not buy the stock at current levels.

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