The Maruti Suzuki stock has fallen 4 per cent over the last one week due to a year-on-year drop in the profitability for the September quarter. The 39 per cent year-on-year rise in the sales for October, which the company announced on Monday, did not help much. The company managed to clock sales of 1.18 lakh units, making it the third consecutive month of one lakh-plus sales. While there is little to complain as far as the volume growth is concerned, the markets are worried about the higher raw material costs and the hike in royalty payments for the September quarter, which are an overhang on the stock.
Demand strong
A large part of the jump in sales for October came on account of a 50 per cent year-on-year increase in volumes for the A2 segment. Given that it has a monthly capacity of about 1.10 lakh units, the higher demand was met by inventory sales. In addition to higher sales of its new K-series Alto, the company’s premium hatchback, Ritz, which was launched in May last year, has also been delivering strong volumes. It achieved one lakh cumulative unit sales in October.
The demand dip in Europe, however, has meant that exports fell 18 per cent. Strong sales in the A2 segment have helped the company regain lost market share over the last couple of quarters. Given the uptick, analysts believe that the company is likely to achieve a 22 per cent year-on-year increase in volumes for 2010-11 to 12.42 lakh. While the company has been able to increase the capacity by 10 per cent by de-bottlenecking operations, it plans to expand capacity by 2.5 lakh units each in 2011-12 and 2012-13 at its Manesar plant and take the total capacity to 17.5 lakh per annum by 2012-13.
| STRONG VOLUMES, MARGINS DROP | |||
| in Rs crore | FY10 | FY11E | FY12E |
| Units (lakh) | 10.2 | 12.4 | 14.0 |
| % change | 28.5 | 22.0 | 12.7 |
| Sales | 29,099 | 35,000 | 41,300 |
| % change | 45.0 | 20.3 | 18.0 |
| Ebitda (%) | 13.4 | 10.7 | 11.0 |
| Net profit | 2,497 | 2,335 | 2,900 |
| P/E (x) | 18.1 | 17.9 | 15.0 |
| E: Estimates Source: Analyst reports | |||
Royalty, cost pressures
While net sales on the back of higher volumes were up 27 per cent year-on-year to Rs 8,937 crore in the September quarter, Ebitda margins fell 220 basis points to 10.5 per cent. Despite price rises, the average realisations were flat due to a drop in export realisations. Ebitda margins were lower due to a 149 basis-point increase in raw material cost to 74.2 per cent and a substantial 160 basis-point increase in royalty to 5.3 per cent of the net sales. Increasing use of the K-series engine and the rise in royalty payments have led to a higher outgo. Volume gains, higher other operating income and other income helped net profit grow 5 per cent. Analysts expect that some of the pressure on the cost front is likely to be offset by the volume gains.
If the demand stays strong, the company will benefit as it brings higher capacity online over the next two years. However, pricing, higher commodity costs, royalty payments and unfavourable currency movements are among the key concerns for the stock. The stronger volume upsides have already been factored in. Entry into the stock at dips at about Rs 1,300 levels should give a 22 per cent return over the next one year.
