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Maruti: A challenging quarter

Oct 31, 2012

Maruti Suzuki announced its results for the quarter ended September 2012 recently. The company reported an 8% YoY increase in revenues, while profits declined by 5% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 8% YoY during the quarter led by good growth in the volumes of 'Ertiga' and enhanced export realisations.
  • Operating profits rise by 15% YoY as margins improve by 0.4% YoY to 6.1%. The same is due to lower other expenses (as a percentage of sales).
  • Net profits decline by 5% YoY on account of higher interest costs and depreciation charges.

Standalone performance summary
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Total Vehicles Sold (No.) 252,307 230,376 -8.7% 533,833 526,272 -1.4%
Net sales 76,744 83,054 8.2% 161,285 190,836 18.3%
Expenditure 72,338 77,969 7.8% 148,773 177,448 19.3%
Operating profit (EBDITA) 4,406 5,086 15.4% 12,512 13,388 7.0%
EBDITA margin (%) 5.7% 6.1%   7.8% 7.0%  
Other income 1,713 1,563 -8.8% 3,554 2,248 -36.8%
Finance costs 109 380 248.1% 168 713 323.4%
Depreciation 2,664 3,470 30.3% 5,088 6,870 35.0%
Profit before tax 3,346 2,798 -16.4% 10,809 8,054 -25.5%
Tax 942 524 -44.4% 2,912 1,541 -47.1%
Profit after tax/(loss) 2,404 2,275 -5.4% 7,897 6,512 -17.5%
Net profit margin (%) 3.1% 2.7%   4.9% 3.4%  
No. of shares (m)         288.9  
Diluted earnings per share (Rs)*         51.8  
Price to earnings ratio (x)*         27.7  
(* On a trailing 12-month basis, adjusted for extraordinary items)

What has driven performance in 2QFY13?
  • Maruti Suzuki's (Maruti) revenue growth of 8% YoY was led by higher volume growth of its brand 'Ertiga' as well as enhanced export realisations. Having said that, volumes were down 9% YoY as the company was impacted by the labour unrest and riots at its plant at Manesar as a result of which there was a lockout there for a certain period. Production at Manesar resumed during the quarter and is gradually moving towards operating at full production. Once again, the company saw a surge in diesel vehicles, while petrol cars saw a decline. Thus, while volumes in the domestic market fell by 6% YoY, those in the export markets dropped 32% YoY.

  • Maruti's operating margins improved by 0.4% to 6.1% in 2QFY13. This was largely due to lower other expenses as a percentage of sales. However, raw material costs increased from 78.5% of sales in 2QFY12 to 79.6% in 2QFY13 on account of unfavourable product mix and higher discounts.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Raw materials/ purchases 60,209 66,110 9.8% 126,186 150,012 18.9%
    % sales 78.5% 79.6%   78.2% 78.6%  
    Staff cost 1,995 2,352 17.9% 3,788 4,735 25.0%
    % sales 2.6% 2.8%   2.3% 2.5%  
    Other expenditure 10,134 9,507 -6.2% 18,799 22,701 20.8%
    % sales 13.2% 11.4%   11.7% 11.9%  
    Total expenditure 72,338 77,969 7.8% 148,773 177,448 19.3%
    Data Source: Equitymaster Research, company

  • Despite the 15% YoY growth in operating profits, Maruti's net profits declined by 5% YoY on account of higher interest & depreciation charges. Had it not been for the lower tax outgo, the company's profits would have fallen even more.

What to expect?
At the current price of Rs 1,436, the stock trades at a multiple of 9.5 times our estimated FY15 cash flow per share and at 16.2 times our estimated earnings per share. The slowdown in the auto industry had a negative bearing on the company's fortunes for the quarter and the labour unrest at Manesar did not help matters either. However, production has resumed at Manesar and is gradually moving towards full production. Further, the management has stated its intention of working on efforts to improve relations with the plant workers. Despite the recent hike in diesel prices, a wide differential still exists between this and petrol. Thus, the company is focusing on strategies to push the sales of its petrol cars. These are some of the headwinds that the company faces in the near term.

Having said that, 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. Overall, at the current price level, we have a 'Sell' view on the stock.

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