Analysts cheer the jump in realisations, expect margins to improve in Q4.
The third quarter of FY12 will, possibly, go down as one of the most challenging for Maruti Suzuki. Sales fell 17.4 per cent, volumes dropped 28 per cent and profits plunged 63.6 per cent. However, much of this was expected, as the company lost 40,000 units in production in the December quarter, thanks to the strike at its Manesar plant.
Despite such dismal numbers, the stock ran up 5.77 per cent after the results. The primary reason for this, explains Deepak Jain, auto analyst at Sharekhan, is the seven per cent sequential increase in net realisation to Rs 3,19,948 per vehicle. Typically, realisations rise when the mix shifts towards higher-end cars. This is happening as the market is becoming polarised, with diesel cars having a five-month waiting period and sales of petrol cars coming off. Since more diesel cars are selling now than a year before, the realisations per vehicle have jumped, as diesel variants have no discounts.
Despite the rise in realisations, the operating margin has crashed to 5.3 per cent, the lowest in several years. Reason: The company has been impacted on three fronts by the appreciating yen. It has to pay royalty to its parent in yen and import components in the same currency. In fact, so far, it has been bearing the currency-driven losses of its vendors, too. However, from this quarter, the company has started buying hedges for vendors, which would prevent any further margin erosion.
On account of a better demand for diesel vehicles and better management of currency risk, analysts like Jain expect margins to recover in the fourth quarter. They may recover by 100-150 basis points. However, volume growth is playing on everyone’s mind. While Hyundai’s Eon and Honda’s Brio were expected to hurt Maruti, analysts feel this has not happened.
However, during its earnings call with analysts, the company refused to give any guidance on the volumes. The launch of the Ertiga and new Dzire are expected to boost demand. While many are building in a recovery in volumes from the fourth quarter, others like Jain believe the worst is over for the auto industry and recovery will only begin from early 2013.