Maruti magic

India's leading car maker has posted a great set of numbers

Maruti Udyog has reported great results for the year ended March 2004, the first full-year number it has announced as a listed company. Income from operations was up 31.3 per cent, while profit before tax leaped 173 per cent. Growth in sales was primarily volume driven "" sales in units grew 30.33 per cent.

In the compact car segment, consisting of Maruti Zen, Alto and Wagon R, sales grew 46.2 per cent. This division accounted for over half of the company's incremental sales last year.

Sales of Maruti 800, the bread-and-butter model, rose at a lower rate of 16.9 per cent. The upgrade to the compact car segment is obviously a welcome sign for the company.

Operating margin improved by a whopping 460 basis points from just 5.3 per cent in FY03 to 9.9 per cent last year. But not much of this improvement was owing to the improvement in product mix.

Maruti enjoyed a royalty waiver on some models and paid 10 per cent less on components sourced from Suzuki last year. This resulted in huge savings. These benefits will continue this year, but obviously wouldn't result in big incremental savings like last year.

Nevertheless, Maruti's efforts to prune costs and improve productivity will continue and is expected to result in further margin improvement. These efforts include the consolidation of its vendor base, localisation of the components used, reduction of inventory and other improvements based on practices followed by Suzuki. Benefits from these measures are estimated to accrue for the next three years.

Analysts also expect that car manufacturers would post double-digit growth, in the region of 20 per cent for at least the next two years. Maruti, the leader of the pack, is expected to benefit the most. It derives around 73 per cent of its sales from cars that cost less than or around Rs 4 lakh. This segment clearly enjoys the highest sales in the country.

What's more, the company has announced plans to invest Rs 350 crore a new facility to manufacture diesel engines for cars. Although production will begin only in 2006, this will boost sentiment for the stock, since diesel cars have fared well in the country.

Suzuki Motor Corporation, Maruti's parent company, has recently entered into a Product License Agreement with Fiat Auto and Adam Opel, Europe, to obtain technology for the manufacture of a 1.3 litre, state-of-the-art diesel engine based on the common rail injection system.

Since Maruti will have the benefit of this technology, analysts are confident of success when the new engines hit the market. Meanwhile, the existing portfolio of products is expected to continue growing thanks to easy financing and higher consumer spending.

Earnings growth is expected to be high double-digits because of the cost saving measures, and in this light, the stock seems reasonable at around 16 times FY05 earnings. What's more the stock is now available at a 25 per cent discount compared to the highs reached just last month.

Realty push for Novartis

Novartis India has reported impressive results for the quarter ended March 04 "" profits have grown 14.81 times to Rs 20.87 crore. Growth in net sales was lower at 33 per cent, and growth in profit was aided by a 100 per cent jump in other income to Rs 21.02 crore.

Again, this was largely due to profit on sale of property at Goregaon, a western suburb of Mumbai. Nevertheless, even operating profit jumped to Rs 8.19 crore last quarter, compared with a loss of Rs 5.45 crore in the previous year March quarter.

The company's pharmaceutical division performed better mainly due to improved demand for Tegrital, an anti-epileptic drug and Exelon, for treating ailments/sickness relating to Alheizemers.

Strong demand conditions coupled with a sharp reduction in supply chain costs, resulted in a turn around for this division-segment profitability amounted to Rs 11.75 crore, compared to a loss of Rs 2.23 crore in the previous year's March quarter.

The generic segment of the company benefited as it was awarded the World Bank funded supply of anti-TB products to the government. However, in the rifampicin market, the company faced stiff competition from imports and it also had to contend with falling domestic prices. Hence, while segment revenues jumped 135 per cent to Rs 26.41 crore, it still posted a loss of Rs 0.43 crore.

But this was better than the corresponding period's loss of Rs 2.32 crore. The company does not expect any significant change in the operating environment of the rifampicin product segment and hence, it has written down the value of this products' production facilities "" the company has impaired the assets of its rifampicin facility at Mahad and the resulting loss of Rs 65 crore has been adjusted against its general reserve.

Going forward, the company's profit is expected to be driven by its exclusive marketing rights for Glivec (used in the treatment of chronic myeloid leukaemia and gastrointestinal stromal tumours). Analysts point out that margins in this segment are estimated at 20-22 per cent and this market is growing at 7-10 per cent.

With contributions from Mobis Philipose and Amriteshwar Mathur