Launches, rural markets positives for Maruti

Pressure on margins likely, given higher marketing and raw material costs, adverse currency movements

Strong realisations and volume growth helped Maruti beat expectations in the quarter ended March. Volumes would have been higher but for the agitation by Jats in Haryana. A product mix skewed towards higher-value premium vehicles, such as Ciaz, S-Cross, and Baleno, helped the company post 12.5 per cent jump in realisations. Overall revenue grew 12.5 per cent, with a 3.9 per cent rise in volumes.

While S-Cross was launched in August 2015, the new Baleno was put on sale from October, and Ciaz over a year ago. Realisations could see incremental gains after the launch of Vitara Brezza in March 2016. While compact segment sales (Swift, Ritz, Dzire, Celerio, and Baleno) are the largest volume generator and constitute half of Maruti’s domestic passenger vehicle sales, the mini segment (Alto, Wagon R), continues to see a decline. Both these trends help in improving product mix by value and aid realisations.

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The other highlight was margins. These fell 60 basis points (bps) year-on-year to 15.7 per cent, whereas analysts’ were expecting these to fall 60-140 bps on the back of 10 per cent yen depreciation against the dollar and higher spends on promotions. While higher-than-expected sales helped, a 190-bps fall in raw material costs as a percentage of sales limited the damage. Import costs and royalty payments account for about 22 per cent of sales and adverse currency movement impacts Maruti’s performance. This could also improve if the company is able to increase the local content, according to its plan.

A 62 per cent drop in ‘other income’ to Rs 121 crore and a 27 per cent increase in taxes to Rs 556 crore led to a 11.7 per cent fall in net profit at Rs 1,133 crore, lower than Bloomberg consensus estimate of Rs 1,188 crore. Nevertheless, the strong performance saw the stock gain 3.6 per cent on Tuesday.

While Society of Indian Automobile Manufacturers has cut passenger vehicle growth to six-eight per cent in FY17 due to higher taxes announced in the Budget, Maruti expects to grow volumes by 10 per cent. Given the expectation of a favourable monsoon, a boost could come from rural markets (35 per cent of FY16 volumes). However, uptick in commodity prices, continuation of high discounts, and adverse currency movement are key downside risks. Also, given higher marketing spends on new launches and expansion of the Nexa showrooms channel, expect pressure on margins.