Lower raw material costs helped Maruti post better-than-expected margins, which analysts believe is unlikely to be sustained.
Maruti Suzuki’s Street-beating performance didn’t impress the markets. On Monday, although the stock opened nearly 2 per cent higher than its Friday’s close (results were declared on Saturday), it gave up the gains during the day.
For the December 2009 quarter, on a year-on-year basis, Maruti’s total income rose 62 per cent to Rs 7,503 crore, operating profit surged 282 per cent to Rs 1,134 crore and net profit rose 222 per cent to Rs 687.5 crore. While the performance is undoubtedly excellent, the surprise was the operating profit margin (OPM) front. Maruti’s OPMs were 15.5 per cent for the quarter, 150-250 basis points higher than what the markets expected.
Analysts said the company benefitted from lower raw material prices, which helped bring down its raw material to sales ratio by 490 basis points year-on-year to 76.2 per cent.
Additionally, the company reported a robust 46 per cent year-on-year rise to Rs 130 crore in other operating income, which comprises scrap sales and export incentives.
Maruti also benefitted from currency movements, albeit to a small extent. The company may find it difficult to sustain margins at December 2009 quarter levels. This is because although the company announced an average price rise of less than a per cent across models on January 16, raw material costs have been on the rise. Analysts expect margins to slip (from 15.5 per cent in the December quarter) to 13-13.5 per cent in the March 2010 quarter and stay around these levels in 2010-11.
In the December 2009 quarter, Maruti sold 258,026 vehicles, which translated into 48.7 per cent growth on a year-on-year basis, due to the low base of the December 2008 quarter, when vehicle sales had fallen both on year-on-year and sequential basis, consequent to the global and domestic economic crisis.
A strong 170 per cent growth in export sales helped by incentives (to customers) by governments of developed countries also helped volumes. Nevertheless, adjusting for the low base, Maruti’s revenue and volume growth is reasonably good at over 30 per cent.
Better volume mix on a year-on-year basis also meant that average realisation per vehicle was higher by a little over 9 per cent. The slower growth in net profit was hampered by a fall in other income (it almost halved) to Rs 91 crore and an over 300 per cent rise in tax outgo to Rs 326 crore.
Apart from the margin pressure on account of rising input costs, analysts believe that Maruti’s volume growth may be sober. They believe that factors such as the likely withdrawal of excise duty cuts on cars, below normal monsoons last year (hence, impact on rural demand) and withdrawal of incentive schemes in key export markets may impact Maruti’s volumes in 2010-11. Analysts estimate the company’s volumes to rise only 10-15 per cent in the next financial year. At Rs 1,445.25, the stock trades at 15.6 times its estimated 2010-11 earnings per share of Rs 92.50 and looks fairly valued.
