Testing times

Maruti may have to give discounts despite hike

Maruti has indicated to its dealers that it plans to hike prices across all its models by up to Rs 15,000 from January. That's one way of pre-empting purchases by customers. In October, the company had raised prices across all models, except the Swift, by around 0.2-1 per cent.

It is unlikely that the hike would be very steep, because except for a couple of models, in particular the Swift, the car maker is not really seeing a strong pull for its vehicles.

While there is obviously a need to pass on increased costs owing to freight and other inputs, it would be difficult for the company to raise prices too much. Ideally, it should take a marginal increase and wait for demand to pick up.

In fact, even if it does raise prices, it might be forced to give discounts, which will keep operating margins under pressure. The impact on bottom line would essentially be the same.

Maruti's combined sales for October and November have been up a fairly good 11 per cent over October and November 2004, and that's mainly because of Diwali sales. The category that's doing the best is the A2 segment, in which the Swift has turned in strong numbers.

While it's not really meaningful to compare November figures (most of the Diwali purchases happened in October this year against November last year), nonetheless the numbers are a little disappointing.

Maruti 800 sales declined 17 per cent, whereas the A3 segment (Esteem and Baleno) fell 27 per cent in November 2005 y-o-y. A 22 per cent rise in A2 segment, which comprises Alto, Zen, Wagon R and Swift, was responsible for the 6 per cent growth in domestic car sales.

Once the company's diesel engine plant is commissioned, Maruti should be able to offer a diesel range of vehicles which should propel sales growth.

At the current price of Rs 620, the stock trades at nearly 15 times 2006-07 earnings. Analyst are positive on the stock primarily because the demand for cars appears to be steady and the Swift is doing well.

JK Paper: On a roll

JK Paper is planning to invest Rs 235 crore for setting up a 60,000 tonne per annum plant to manufacture packaging board, which is a high-end paper. Price realisations in the high-end coated segment are about 15 per cent higher than the uncoated segment.

Also, this expansion plan does appear logical given that demand from user industries such as the FMCG industry is estimated to be growing at 8-10 per cent. The stock gained about 3.5 per cent to Rs 65.2 on Thursday.

To fund this expansion, the company is planning to utilise a mix of debt and equity - it will raise Rs 170 crore from the capital market. The company's cash flow (net profit plus depreciation) amounted to Rs 77.88 crore at the end of its financial year in June 2005.

JK Paper has also set up a 46,000 tonne plant at an investment of Rs 80 crore at its facilities in Orissa recently for making high-end coated paper. At the end of June 2005, its installed capacity for paper and board including pulp for sale amounted to 1.5 lakh tonne.

Thanks to its forestry management programmes, JK Paper can manage the cost of wood pulp, its key raw material, better. However, prices of other inputs such as caustic soda and chlorine have risen sharply.

But better cost management and recent price hikes have helped the company's operating profit margin expand 125 basis points on a y-o-y basis to 19.37 per cent in the September quarter.

Going forward, the management's emphasis on higher value products is expected to improve operating margins further. The stock appears reasonably valued at about 9.5 times estimated 2005-06 earnings.

Contributions from Shobhana Subramanian and Amriteshwar Mathur