Maruti Suzuki Ltd

Investors can continue to hold the Maruti Suzuki stock. At the current market price of Rs 1,514, it trades at a PE of 18 times its trailing 12-month earnings. Fresh exposures need not be considered at this point in time, as buoyant automobile sales and capacity de-bottlenecking notwithstanding, Maruti has found it difficult to transfer the topline growth to the bottomline in the first and second quarters.



Hike in royalty payments, rise in input costs and currency fluctuations have played spoilsport. Besides, the company has also lost some market share due to stiff competition.

Muted profit growth

For the quarter ended September 2010, the company's net sales increased by 27 per cent year-on-year to Rs 8,937 crore and net profits grew by 5 per cent to Rs 598 crore. EBITDA margins came in at 10.7 per cent.

In addition to the input cost escalations that have affected auto makers, in general, a few things have worked against the company so far this year.

First, a major portion of the increase in revenues has been volume-based. That realisations have not contributed much to the revenues indicates that the company's sales mix has had a higher proportion of vehicles which yield lower margins. The weakening of the euro could have also dampened export revenues.

Though European exports have declined after the removal of scrappage incentives, the company still receives about 50 per cent of its export revenues in Euro. Besides, pressure on pricing due to competitive small car launches such as the Figo, Polo, Beat and Micra could have also had a negative impact on realisations.

A hike in royalty payment to Suzuki and strengthening of the yen (in which imports are billed) have also affected the company's performance. From an average of 3-3.5 per cent of net sales until last year, the royalty has moved up to 5.3 per cent of net sales in the September quarter (5.1 per cent in Q1).

As higher royalty is due to a regulatory change, the impact of increased royalty charges will be felt in the future as well. More so, because newer technology from Suzuki such as the K-series engine or other forthcoming launches will attract higher royalty than older ones.

Apart from this, going forward, the pressure on the margins is expected to continue as aluminium and rubber prices move up. The company has also agreed to a 1 per cent increase in steel prices with retrospective effect from April 2010. Also, as imports constitute about 28 per cent of net sales and are predominantly yen-denominated, adverse movement in the yen vis-à-vis the rupee could have a negative impact on margins. For the second half of this year the company has hedged 25 per cent of its direct import expenses. However, the indirect exposure through vendors, constituting about 10 per cent of raw material costs remains largely unhedged. Maruti expects full impact of the adverse movement of the yen to be visible from Q3FY-11.

Robust volumes

The company has witnessed strong volumes since the turnaround last year. For the six months ended September 2010, domestic sales volumes have grown by 28 per cent over last year, outpacing the industry growth of 22 per cent.

The Society of Indian Automobile Manufacturers (SIAM) has forecast a growth of about 12-13 per cent in the passenger cars segment for 2010-11, taking into account a possible slowdown as the base effect sets in the second half. But there is no sign of any moderation yet. The third quarter being the festival season, the sales momentum is expected to continue.

Given the surging demand, the lengthening wait period for most of its models and the consequent loss of potential customers in recent times, the company is adding one more production line to its existing plant at Manesar which will be operational by September 2011.

It is upgrading and modernising its Gurgaon facility to increase production capacity. It is also setting up a third new plant at Manesar, which will take its total capacity to about 17.5 lakh units by 2012-13, from about 12 lakh units currently.

Promising in the long-term

What holds promise over the long term is the company's move to break away from the image of a small car maker as also the setting up of an R&D centre in India. This will help push up realisations and margins.

The Kizashi, a premium sedan in the Rs 18-22 lakh price range will be launched shortly. Maruti has also showcased its concept multi purpose vehicle (MPV) in the Auto Show this year.

What will also augment Maruti's move in this direction is the possible tie-up with Volkswagen. The company will benefit from Volkswagen's expertise in large sedans and diesel engines. Currently, 70 per cent of the Swift and Dzire volumes and 55 per cent of the Ritz volumes are from diesel cars. The company is also launching a diesel version of the SX4 shortly.

via BL