Maruti Suzuki: High volumes, low costs rev up earnings

Company expects to improve market share on the back of new launches, aggressive pricing

Maruti Suzuki’s performance in the quarter ended September was broadly in line with estimates. Yet, the stock gained 2.44 per cent on a day when broader indices were down by half a percentage point. The fact that the outlook, too, is good this should reflect positively on the stock.

Given the strong volumes, up about 10 per cent year-on-year on the back of new launches, Maruti’s revenue rose 13 per cent compared to the year-ago period. Higher realisation, up three per cent due to a favourable product mix, aided revenue growth.

On a sequential basis, the company’s market share in the passenger vehicles segment rose by a percentage point to 47.7 per cent in the September quarter on the back of higher sales of entry-level cars, as well as sports utility vehicles such as the S-Cross. While volumes have been strong and the company gained market share, the rise in average discounts a worrying factor. This rose from Rs 16,000 a vehicle in the June quarter to about Rs 19,500 a vehicle in the quarter ended September. Analysts say the company’s focus has been to improve volumes and maintain or increase market share. Part of the reason behind higher average discounts is a rise in the value of new cars launched (such as the Ciaz and S-Cross), which are of higher value, leading to higher net realisations.

 

Robust top line growth, coupled with savings from falling raw material costs, helped the company post strong operating profits, up 48 per cent year-on-year. A large part of this was due to a steep fall in raw material costs, as percentage of sales. Operating leverage, coupled with depreciation in the yen, helped margins rise about 400 basis points to 16.7 per cent.

Consequently, net profit soared 42 per cent to Rs 1,225 crore, marginally lower than analysts’ estimates. Even as interest costs fell by half, it was lower other income (largely non-core) and a 127 per cent increase in taxes (at Rs 494 crore) that impacted year-on-year growth in profit. The tax rate increased to 28.7 per cent in the September quarter from 20.2 per cent in the year-ago period.

Analysts are bullish on the company’s prospects, especially on the sales front, given expectations of robust volumes from new launches and filling of product gaps. The company’s latest launch, the Baleno, is positioned at the premium hatchback segment (Elite i20, Jazz), which has been growing at a good pace but in which Maruti did not have a product. Given the aggressive pricing (five-seven per cent cheaper than peers) for a feature-rich product, analysts expect the Baleno to sell about 4,000 units a month in a segment with a monthly run-rate of 20,000 units. The pace of the Nexa showroom rollout will decide whether the company will fare well with the Baleno. While most product gaps have been filled, analysts say the company could look at a compact sports utility vehicle and products priced above Rs 10 lakh. This will help Maruti transform its image of a small-car company.

For the sector, while sales so far this financial year are up six per cent, it is largely on the back of new product launches. Analysts at Goldman Sachs say if one excludes new launches, car demand has not picked up meaningfully. At 40 per cent, first-time buyer activity is lower than the 55 per cent peak seen earlier and is an indicator of current weak demand. Analysts say falling interest rates should improve the situation, with a volume pick-up across passenger vehicle categories expected in the coming festive season.

At the current price of Rs 4,495, the stock is trading at 19 times its FY17 estimate. Most analysts have a ‘buy’ recommendation on the stock.