Maruti: A chequered ride

Maruti's price hike will boost margins, but it is priced in the stock

Maruti has announced its first major price hike since prices of inputs such as steel, rubber and plastic soared.

The proposed price hike of Rs 5,000 to Rs 20000 in 2005 works out to an increase of about 2-3 per cent and is much higher than the company's previous two price hikes this year.

It had raised prices between 0.3 per cent and 0.4 per cent in August, which was just enough to offset the education cess of 2 per cent (on excise).

Although the move was expected, especially since Hyundai has already raised prices, the very fact that margins would be provided a buffer of 200-250 basis points is a big positive.

At the same time, volumes are not expected to be impacted because of the price increase. Most car sales are financed, and the price hike will have a negligible impact on equated monthly instalments.

Maruti has done exceedingly well this fiscal: last quarter, its operating profit jumped by 48 5 on the back of a 25 per cent rise in sales "" and the good performance is expected to continue through FY06.

But starting 2007, the company's growth will largely be captured in a joint venture with Suzuki, in which Maruti will have a 70 per cent stake.

It's still not clear how issues such as transfer pricing and marketing margins will be dealt with when the venture is operational. For this reason, the stock had dropped to the Rs 350-levels around the time of the announcement.

The stock now trades at Rs 475, much higher than even the levels before the announcement, thanks only to a rising market.

Cement industry

For the first time in four years, November-end inventories in the cement industry (cement plus clinker) have fallen below the six million tonne level, according to a research by Motilal Oswal. At 5.93 million tonne, the inventories take care of just 17 days consumption compared with 7.05 million tonne in November last year.

This is significant because the March and June quarters are the two best periods for the industry. If inventories are down before a period of high consumption, it could result in a shortage in some regions, which could lead to higher prices.

The lower inventories have resulted from double-digit growth in offtake in the last three months which has taken the capacity utilisation to 82 per cent.

Capacity utilisation has been going up post monsoon with the uptick in despatches and since August it has been at he highest level in the last five years. Analysts now expect utilisation to touch 100 per cent by March.

Demand for cement is set to grow between 6 per cent and 7 per cent over two years, driven by the housing and infrastructure.

This augurs well for the industry, especially given the high utilisation levels currently. Also, there is virtually no capacity coming on stream for at least 12 months so the supply could remain at just over 117 million tonne. The demand-supply gap might be bridged and manufacturers might soon get better realisations.

MRF: changing outlook

Most tyre companies have reported lacklustre September quarterly results owing to high input (rubber) prices. The story is no different with MRF, which saw its September quarter profit (before tax and exceptionals) drop 19.3 per cent to Rs 17.67 crore. Rubber is the principal raw material for tyre companies accounting for approximately 50 per cent of raw material costs.

The near 25-27 per cent year-on-year rise in rubber prices in the September quarter seems to have taken its toll on MRF.

Although segment revenue of the key rubber products division grew 13.1 per cent to Rs 671.11 crore in the September quarter, segment profit dropped 26 per cent to Rs 21.71 crore in the last quarter. Apollo Tyres, MRF's rival, had seen its net profit drop 14 per cent last quarter.

Original equipment manufacturers (OEMs) have been resisting tyre price hikes since there has been pressure on the cost base already from rising steel and other input prices.

However, tyre makers had increased prices in the replacement segment by approximately 2-3 per cent in the September quarter. But this could not prevent a fall in margins simply because of the large volumes on OEM sales.

MRF's operating profit margin fell 219 basis points to 6.54 per cent. For the year ended September 2004, the situation was not much better "" operating profit margin fell 245 basis points, leading to a 11 per cent fall in operating profit despite an 18 per cent rise in sales.

With rubber prices showing signs of easing in the past few weeks, profit margins of tyre companies are expected to improve. But this seems to be prices in the stock, which has risen over 90 per cent since August and now trades at over 16 times trailing earnings.

With contributions from Mobis Philipose, Shobhana Subramanian & Amriteshwar Mathur