Maruti: Long drive

Maruti has managed to offset rise in raw material costs

Maruti Udyog's continued focus on higher margin A2 segment, comprising Swift and Alto, has helped it to offset the rise in cost of steel and non-ferrous products, and in turn, report improved margins.

As a result, operating profit expanded 36 per cent y-o-y to Rs 475.6 crore in the September 2006 quarter compared with 12.6 per cent growth in income from operations to Rs 3,419.19 crore. The stock was up 0.5 per cent to Rs 951 on Thursday.

Maruti's total vehicle sales grew 12.2 per cent y-o-y to 157,683 units in the last quarter, despite exports falling 31.3 per cent. But once again, it was the A2 segment which expanded 22.4 per cent y-o-y.

In the June 2006 quarter, the company had seen total unit sales expand 19 per cent y-o-y. Maruti's adjusted raw material costs as a percentage of income from operations declined 300 basis points y-o-y to 74.8 per cent in Q2 FY 07.

As a result, Maruti's operating profit margin grew 240 basis points y-o-y to 13.9 per cent in the last quarter. This performance is unlike the trend in the two-wheeler segment, where intense competition has resulted in margin deterioration for Hero Honda and TVS Motor.

In the June 2006 quarter too, the company had seen its operating margins improve by 224 basis points y-o-y to 14.6 per cent.

The high cost of metal inputs and rising cost of consumer finance loans remain areas of concern. And with the stock trading at 26 times estimated FY07 earnings, there seems little room for an upside in the near term.

Oil refiners: Losing out

With gross refining margins declining substantially on a y-o-y basis, oil refiners have reported lacklustre September 2006 quarter results.

Bongaigaon Refinery (BRPL) has seen its operating profit grow merely 2.3 per cent y-o-y in Q2 FY07 compared with 40.65 per cent growth in net sales.

This refiner has seen its crude throughput fall marginally on a y-o-y basis to 0.57 million tonne in the last quarter.

However, its gross refining margins (GRMs) fell to $2.7 per barrel in the last quarter compared with $4.6 per barrel a year earlier. The regional benchmark "" the Singapore refining margin had also dropped in the last quarter.

Weaker GRMs were partially offset by the subsidy burden for OMCs falling 60 per cent y-o-y in the last quarter. Nevertheless, BRPL's operating profit margin fell 170 basis points y-o-y to 4.6 per cent in Q2 FY07.

Meanwhile, Chennai Petroleum had also seen its operating profit margin dip 355 basis points y-o-y to 3.6 per cent in Q2 FY07, owing to weaker GRMs. Even in Chennai Petroleum's case, 24.2 per cent y-o-y fall in subsidy burden did not prevent the pressure on margins.

Pure refiners are expected to see continued pressure on margins, given the weakness in GRMs on a y-o-y basis. As a result, BRPL gets a discounting of 5.5 times estimated FY07 earnings, while CPCL trades at 4 times FY07 EPS.

Larsen & Toubro: Firm footing

Though L&T's top line improved by 12.4 per cent y-o-y in September 2006 quarter, operating profit shot up by an impressive 123 per cent.

Operating profit margin improved by 383 basis points y-o-y to 7.71 per cent, better than the 6.8 per cent margin in Q1. Earlier contracts are now contributing to higher profits, as they near completion.

At the end of Q2, the company's order backlog in the E&C segment at a healthy Rs 29,270 crore, was up 52 per cent y-o-y and 6.6 per cent q-o-q.

Even though the 15 per cent growth in orders booked (E&C) during the quarter was low, the first quarter order-book growth of 121 per cent, indicates that the company should end the year with more than its targeted 30 per cent order book growth for FY07.

L&T's smaller businesses grew at over 20 per cent in Q2. The growth in engineering and construction (E&C) segment, which contributed to 71 per cent of revenues, was at 8.8 per cent y-o-y.

International revenues accounted for 19 per cent in Q2 FY07 compared with 17 per cent in Q1. Staff costs increased 45 per cent, but that is due to the growth in business as well as pressure on engineers' salaries.

L&T also managed its raw material costs better, as they declined 105 basis points y-o-y as a percentage of operating revenues. With improved business climate, L&T should continue doing well, and it is no surprise that the stock commands a P/E multiple of 24 times its FY07 earnings.