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Weak yen & lower costs drive Maruti Suzuki's Q4 margins

Operating margins up 300 bps to 10.8% in fourth quarter, expands market share by 1% in FY13

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Even though Maruti Suzuki's fourth quarter volumes reflect the stress the industry is witnessing, it managed to grow sales and earnings thanks to its robust diesel portfolio. While Q4 volumes declined 4.6 per cent year-on-year (y-o-y), the company has managed to grow revenue by nine per cent. Now, diesel cars account for 58 per cent of overall sales. This has also had an impact on realisations.

In Q4, Maruti's realisations grew 14.4 per cent annually and 0.2 per cent sequentially, on a better product mix. It's this changing product mix that has helped the company clock better-than-industry volumes and margins. Average discounts too, were down sequentially to Rs 10,000 in Q4 compared to Rs 12,000 in Q3. In FY13, Maruti's volumes grew 4.4 per cent, while the industry's volumes declined 2.2 per cent. As is the case in a slowing market, Maruti expanded its market share by one per cent to 39.5 per cent in FY13.

While the headline volume numbers look good, they must be viewed in light of the strikes the company saw in the previous financial year. The highlight of the fourth quarter was the sharp uptick in operating margins, explains Dhananjay Sinha of Emkay Global. The market has been taken by surprise as the margin expansion of over 300 basis points annually is a big positive. The company exited the financial year with of 10.4 per cent. Mitul Shah of Karvy believes the merger of with Maruti also had a beneficial impact on margins. The weakening of the yen against the dollar in Q4 added 130 basis points to the operating margin. Maruti has fairly high exposure to the yen in the form of direct and indirect exports, apart from the royalty payout. Consequently, the company reported operating profit Rs 1,330 crore, an increase of 54.7 per cent y-o-y and 49 per cent sequentially, ahead of most analyst estimates.

The company also benefited from lower raw material and manpower costs. In the fourth quarter, raw materials as a percentage of sales fell by 180 basis points sequentially and 300 basis points y-o-y to 76.6 per cent. So, what's in store in FY14? Analysts expect sales to improve in the second half as demand for utility vehicles might be strong. Analysts are largely positive on the stock, as operating margins are expected to sustain in the 10 per cent region as the yen has fallen to 100 against the dollar and as a result, operating margins could rise by another 40-50 basis points.

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