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Maruti: Input costs spoil performance
Nov 2, 2010

Maruti Suzuki announced its 2QFY10 results recently. The company reported a 27% YoY increase in revenues, while profits grew by 5% YoY only. Here is our analysis of the results

Performance summary
  • Revenues grow by 27% YoY during the quarter, on the back of a similar rise in volumes. Revenues up by 27% YoY during 1HFY11.
  • Operating profits increase by 5% YoY as margins contract by 2.2% YoY to 10.5. Higher raw material costs and royalty expenses are key reasons for the same.
  • Net profits rise by 5% YoY in line with the increase in operating profits. Net profits fall by 8% YoY during 1HFY11.

(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Units sold         246,188         313,654 27.4%         472,917      596,978 26.2%
Net sales           72,038           91,473 27.0%         136,962      174,535 27.4%
Expenditure           62,877           81,870 30.2%         119,869      157,006 31.0%
Operating profit (EBDITA)             9,161             9,603 4.8%           17,093         17,528 2.5%
EBDITA margin (%) 12.7% 10.5%   12.5% 10.0%  
Other income             1,100             1,340 21.8%             3,265           2,342 -28.3%
Interest (net)                   60                   97 62.8%                 123              177 44.1%
Depreciation             2,031             2,382 17.3%             3,992           4,799 20.2%
Profit before tax             8,171             8,464 3.6%           16,244         14,894 -8.3%
Tax             2,471             2,481 0.4%             4,708           4,258 -9.6%
Profit after tax/(loss)             5,700             5,982 5.0%           11,535         10,636 -7.8%
Net profit margin (%) 7.9% 6.5%   8.4% 6.1%  
No. of shares (m)                   288.9           288.9  
Diluted earnings per share (Rs)*                     83.3  
Price to earnings ratio (x)*                     18.1  
*On a trailing 12-month basis

What has driven performance in 2QFY11?
  • Maruti Suzuki (Maruti) reported a 27% YoY increase in net sales on the back of a similar increase in volumes. Growth in volumes was led by the domestic market, while exports during the quarter dropped by 4% YoY. The reason for the latter was lower sales to Europe. Domestic sales volumes increased by 33% YoY and formed about 89% of total sales volumes. Growth in domestic sales was led by the company's C, A2 and A3 segments, with their volumes rising by 87% YoY, 30% YoY and 29% YoY respectively.

    Maruti's gross revenues (including excise duty) increased by 29% YoY during the quarter ended September 2010, while net sales (excluding excise duty) increased by about 27% YoY.

    Sales break-up...
    Domestic Models 2QFY10 2QFY11 % change
    A1 M-800      8,737      5,207 -40.4%
    C Omni, Versa    22,200     41,596 87.4%
    A2 Alto, Wagon-R, Zen, Swift, Ritz, A-Star  153,096   198,953 30.0%
    A3 SX4, Dzire    24,278     31,362 29.2%
    Total passenger cars    208,311   277,118 33.0%
    B Gypsy, Vitara        772         818 6.0%
    Total domestic    209,083   277,936 32.9%
    Exports      37,105     35,718 -3.7%
    Grand total    246,188   313,654 27.4%

  • Maruti felt some pressure at the operating level during the quarter, as its operating profits rose by 5% YoY only. Operating costs increased by 30% YoY led by higher input costs (raw materials) coupled with higher other expenses. The company's operating margins stood at 10.5% as compared to 12.7% during the corresponding quarter last year. However, on a sequential basis, margins were higher this quarter (as royalty payments during the preceding quarter included payments for earlier quarters).

    Maruti faced a double whammy in terms of forex currency this quarter. It must be noted that the company has exposure to the Japanese Yen as it pays royalty as well as imports technology from the parent company (these form about 28% of the company's revenues). As such, due to the Yen appreciation against the Rupee, the company had to shell out more money this quarter. Plus, with the Euro depreciating against the Rupee, realisations from Europe were lower.

    Cost break-up
    (Rs m) 2QFY10 2QFY11 Change
    Raw materials           54,555           70,756 29.7%
    % sales 75.7% 77.4%  
    Staff cost             1,263             1,568 24.2%
    % sales 1.8% 1.7%  
    Other expenditure             7,059             9,545 35.2%
    % sales 9.8% 10.4%  

  • Maruti's net profits increased by 5% YoY. While the company saw an increase of 22% YoY in other income, the same was offset by a sharp increase in depreciation charges, which led to a 4% YoY increase in profit before tax. However, a lower tax outgo helped the company increase its bottomline marginally.

What to expect?
At the current price of Rs 1,508, the stock trades at a multiple of 11 times our estimated FY12 cash flow per share and at 17 times our estimated earnings per share. (ResearchPro subscribers, kindly click here). Keeping in mind that the company will be focusing on launching vehicles with better technology (which is largely imported), it will have issues against volatile currency movements. While the company is making efforts towards localization, it will still take some time for it to bring it down to desired levels. We see this as a concern for the company going forward. Also with the auto industry facing cost pressures in terms of commodity prices, passing on these prices to customers will not be an easy task considering that competition has increased significantly. As per Maruti's management, it does not plan to hike prices of its vehicles to offset both the currency and input costs. This is the strategy at least for the near term.

However, as regards to demand, the same remains buoyant. But growth rates would eventually slowdown, given the high base effect witnessed by the industry and the company last year. As for our view on the company, we maintain a cautious view on the stock at current levels.

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