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Maruti: Manesar woes hamper growth
Oct 31, 2011

Maruti Suzuki announced the second quarter results of financial year 2011-2012 (2QFY12). The company reported a 14% YoY decrease in revenues, while profits plunged by 60% YoY. Here is our analysis of the results.

Performance summary
  • Net sales fall by 14% YoY in 2QFY12 as labour trouble at Maruti's Manesar plant hampers production.
  • Operating margins tumble by 4.2% to 6.3% during the quarter.
  • Fall in both sales and operating profits takes its toll on the bottomline as well which declines by 60% YoY.


(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Units sold 313,654 252,307 -19.6% 596,978 533,833 -10.6%
Net sales 91,473 78,316 -14.4% 174,565 163,530 -6.3%
Expenditure 81,880 73,374 -10.4% 157,049 150,445 -4.2%
Operating profit (EBDITA) 9,593 4,942 -48.5% 17,515 13,086 -25.3%
EBDITA margin (%) 10.5% 6.3%   10.0% 8.0%  
Other income 1,350 1,177 -12.8% 2,355 2,978 26.5%
Interest (net) 97 109 12.3% 177  167 -5.8%
Depreciation 2,382 2,664 11.8% 4,799 5,088 6.0%
Profit before tax 8,464 3,346 -60.5% 14,894 10,809 -27.4%
Tax 2,481 942 -62.0% 4,258 2,912 -31.6%
Profit after tax/(loss) 5,982 2,404 -59.8% 10,636 7,897 -25.8%
Net profit margin (%) 6.5% 3.1%   6.1% 4.8%  
No. of shares (m)       288.9 288.9  
Diluted earnings per share (Rs)*         69.7  
Price to earnings ratio (x)*         16.1  
* On a trailing 12-months basis

What has driven performance in 2QFY12?
  • Maruti Suzuki (Maruti) sales fell by 14% YoY during the quarter as overall volumes dipped by 20% YoY. The prime reason for this fall was attributed to the labour troubles at the company's plant at Manesar which severely hampered production. Besides this, the company was also impacted by dual issues of rising fuel prices and interest rates which acted as a dampener on demand. While the domestic sales volumes for the A2 segment dropped by 23.5%, the A3 segment saw a 21% YoY fall in sales volumes. For the half year period, total revenues fell by 6% YoY.

  • Maruti's operating margins plunged by 4.2% to 6.3% this quarter. Loss in production at the Manesar plant was one of the reasons for the fall in operating profits. Not just that, because of the tepid environment in the domestic market, the company spent more on advertising and sales promotion which also put pressure on margins. For the half year period, operating profits fell by 25% YoY.

    Cost break-up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw materials 70,756 61,566 -13.0% 134,858 128,512 -4.7%
    % sales 77.4% 78.6%   77.3% 78.6%  
    Staff cost 1,568 1,995 27.2% 3,178 3,788 19.2%
    % sales 1.7% 2.5%   1.8% 2.3%  
    Other expenditure 9,556 9,814 2.7% 19,013 18,145 -4.6%
    % sales 10.4% 12.5%   10.9% 11.1%  
    Total 81,880 73,374   157,048 150,445  

  • With sales and operating profits declining, net profits were not spared either as they plunged by 60% YoY. Volatility in exchange rates further compounded the company's woes. For the half year period, fall in net profits was lower at 26% YoY.

What to expect?
At the current price of Rs 1,124, the stock trades at a multiple of 6.4 times our estimated FY14 cash flow per share and at 9.5 times our estimated earnings per share. The company's performance over the last few quarters has been impacted by the slowdown in the overall auto industry and labour troubles at Manesar which severely impacted production and thereby growth. The next few quarters are also likely to be tight for the company as it looks to make up for the loss in production in the quarters gone by. Volatility in exchange rates especially the Yen could also have a bearing on the company's fortunes.

However, these are near term concerns and from a longer term perspective the robust growth in the Indian economy, thrust on infrastructure and rising disposable incomes is expected to spur the growth in Maruti's sales volumes. The company also stands to benefit on the back of its strong reach, relatively affordable products and strong brand and after sales services. Maruti's Board also granted approval to purchase land in Gujarat to ramp up the company's production facilities.

We will have to downgrade our estimates for the year given the fall in sales and profits during 1HFY12. Having said that, we advise investors to hold on to the stock from a long term perspective.

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