Maruti Suzuki India Ltd’s showing in the June quarter wasn’t bad, when viewed against a backdrop of challenges.
First, production was disrupted for a few weeks due to a fire at one critical supplier’s factory. So, sales growth was a tepid 2.4% year-on-year (y-o-y). Most of the growth came from domestic sales, notwithstanding the sluggish rural market that comprises a significant part of Maruti Suzuki’s sales. Worse, exports fell by 28% y-o-y, given the high base in the previous period with sales in Sri Lanka.
Still, what drove the 11.6% y-o-y rise in net revenue to Rs.14,927.3 crore is the 9% growth in realization per vehicle sold. This came on the back of new launches during the last several months.
Second, commodity prices, mainly steel and rubber, have been on the upswing, with aluminium too following. This is mirrored in the rise in raw material costs as a percentage of sales when compared with the March quarter. To some extent, this was offset by lower “other expenses”.
Third, the appreciating Japanese yen has adversely hit profitability too as it impacts royalty payments and the cost of imports. Maruti Suzuki’s increasing drive towards higher indigenization of production is a step to alleviate this.
The management, in its analysts’ conference call, said that it perceives a greater risk to profit margins in the quarters ahead from commodity prices rather than currency.
In spite of these roadblocks, the country’s largest car maker posted a 14.8% operating margin. Expectedly, this was 140 basis points lower than a year back. Therefore, the fact that the operating profit expanded, albeit by a subdued 2.2%, is commendable. A basis point is 0.01%.
But Maruti Suzuki’s shares closed 1.44% lower at Rs.4,485.25. Normally an outperformer, the stock has underperformed benchmark indices in the past six months. Perhaps currency and commodity risks will continue to weigh on margins.
ALSO READ | Maruti Suzuki beats estimates with 23% rise in June quarter profit
Further, investors must note that restating the numbers in accordance with the new Indian Accounting Standards actually favoured Maruti Suzuki’s numbers. “Other income soared by 134% from a year back due to investment income recognition changes under the new norms,” said Nitesh Sharma, analyst, PhillipCapital (India) Pvt. Ltd. This is not all. Lower depreciation, due to change in policy towards dies and moulds used in manufacturing, also aided net profit. It was 25% higher than a year back at Rs.1,486.2 crore.
Yet, one cannot ignore the fact that the stock is the best play in the auto segment. Maruti Suzuki’s shares trade at about 24 times one-year forward estimated earnings per share, which is reasonable. For a re-rating of the stock, investors should watch for better sales growth, revival in the rural market, lower discounts and higher indigenization.
