Maruti Udyog Ltd

Maruti Udyog Ltd
CMP: Rs810
Recommendation: HOLD

Maruti Udyog Ltd (MUL) registered a 35.2% yoy increase in net sales during Q4 FY07. This was higher than our expectation of 30.4% yoy growth. However, this growth came at the cost of substantial margin reduction of 240bps yoy during the quarter. Factoring in margin pressures, we projected a 13.9% OPM for the quarter. However, the actual fall in OPM was even severe on account of loss at Manesar plant due to power issues.

Maruti sold a 674, 924 units, including exports of 39,295 units during FY07. The company has been building a good product portfolio. While it had planned to launch five new vehicles in five years, it has been successful in doing so in 2.5 years itself. Besides introducing the WagonR Duo and the Zen Estilo during FY07, MUL entered the diesel car segment with Swift Diesel.

Pressure on operating profit margins is expected to continue with high marketing and promotion expenses. With the ongoing cricket world cup, other expenses have been high. Competitive pressures and promotions for new launches will keep margins in check. Mr. Khattar stated that he expects input pressures on account of rising commodity prices to continue. He also stated that near term focus would be on gaining market share rather than margins. We project a 100bps yoy decline in OPM during FY08 for MUL. While input cost and other expenses are likely to remain high, we expect MUL’s realizations to marginally improve during the period.

The net profit for MUL grew by 24.3% yoy during Q4 FY07, significantly higher than our expectation for the quarter. The prime reason for the same was the huge jump in other income earned during the quarter, growing by 77.8% yoy and accounting for 30.7% of the PBT income. The Board has recommended a final dividend of Rs4.5 per share for the year.