Maruti Q3 in top gear on premium brands, cost control

Despite muted volumes due to the impact of demonetisation, Maruti Suzuki India (MSI) posted a good 12.5 per cent year-on-year (YoY) growth in net sales to Rs 16,623 crore for the December quarter. The revenue performance was in line with analyst estimates. Increasing proportion of higher value brands such as Vitara Brezza, S-Cross (utility vehicles) and Baleno (hatchback) helped the automaker boost revenues and overcome the disappointment (three per cent growth) in volumes to 387,000 units in the quarter. The company now sells each unit at an average price of Rs 4.3 lakh, which is nine per cent higher than the last year’s average of Rs 3.94 lakh; discounts though haven’t gone up as much.

The revenue performance also reflected in the operating profit, moving up 16 per cent YoY to Rs 2,489 crore in the December quarter. Operating profit margins, thus, improved 50 basis points (bps) to 15 per cent, helped by a 150-bp fall in other expenses (lower promotional costs) as a proportion of sales to 12.5 per cent. What helped the operational performance was the lower discounts as well as cost reduction efforts. 

Estimates suggest the average discount stood at Rs 19,000 a unit in the December quarter, slightly lower than the year-ago period (though higher than Rs 16,000 a unit on a sequential basis). The operating gains would have been higher but for the 60-bp increase in raw material costs as a percentage of sales to 70.2 per cent and adverse foreign currency movement. Raw material costs to net sales increase at 160-bp were more pronounced on a sequential basis, with a majority of costs due to higher prices of steel. 

Analysts highlighted three areas which could impact the margins: movement of the yen, commodity prices and utilisation levels at its plants. Margins could improve on the back of higher utilisation at its (Suzuki’s) new plant in Gujarat, given that demand remains strong, especially for its new models, which have a waiting period.

Strong topline coupled with higher other income increased net profit to Rs 1,744 crore, up 47.5 per cent over the year-ago period. This was largely in line with expectations. Other income jumped 144 per cent YoY to Rs 592 crore. However, over sequential basis, the other income was down 27 per cent. The management indicated that gains from investments were higher in the September quarter, given the fall in interest rates. The company attributed the profit performance to increase in share of higher segment models, lower sales promotion and marketing expense, cost reduction exercise, and higher non-operating income. 

Reacting to the results, the MSI stock ended one per cent higher on Wednesday to close at Rs 5,797 on the BSE.

Sales volumes are expected to pick up as demand picks up across segments and the company clears the waiting periods of Baleno (24 weeks), Brezza (18 weeks) and the recently launched Ignis (8-10 weeks). How the volume movement plays out, especially in utility vehicles (UVs), which is the fastest-growing segment within the Maruti portfolio, is key. In the December quarter, for example, sales of UVs (Gypsy, Ertiga, S-Cross, Vitara Brezza) were up 88 per cent YoY. The segment, however, constitutes just 14.4 per cent of the Maruti volumes. While the contribution is small, analysts say the company has grabbed 27-28 per cent market share in the UV space, from being a bit player in the space a couple of years ago and the company’s volumes in the space are growing at double the growth of the industry.