Gathering speed

While Maruti had a stupendous quarter on the back of rising volumes, the stock price reflects these gains.

Riding on tax breaks and festival demand, India’s largest passenger vehicle player, Maruti Suzuki post a 47 per cent year-on-year jump in sales to Rs 7,050 crore for the September 2009 quarter. Rising sales of new models such as the A-Star, Ritz and Zen Estilo helped boost sales volumes by 30 per cent to 2.46 lakh units.

Demand drivers
While the company’s sales have been robust to the rural segment and government employees, urban demand is also looking up. The rural segment, which reported healthy growth during the quarter, has steadily grown and now accounts for 16 per cent of sales (up from 5 per cent a couple of years ago). On the other hand, urban demand has also seen a growth of about 8 per cent y-o-y during the quarter. Demand for its best selling models – Dzire and Swift which have a waiting period of two months – and exports is keeping realisations as well as margins higher. However, while the car maker is expected to achieve a 16 per cent y-o-y sales growth in 2009-10 to about 9.18 lakh units, expect the spike in sales due to festival demand to taper off over the next couple of quarters. Some models might continue to be on a waiting period given that the company is operating at full capacity and new capacities will come into play only in 2010-11. 
 

SEASONAL GAINS
in Rs crore	Q2 FY10	FY10E	FY11E
Net sales	7,049	26,258	30,295
% change y-o-y	46.7	25.5	15.3
OPM (%)	11.2	12.8	12.9
change in bps	350	310	10
Net profit	570	2,065	2,454
% change y-o-y	92.5	39.5	19.5
P/E (x)	–	19.3	16.2
Source: Company, Edelweiss Securities

Margins, exports jump
In addition to higher volumes, a better sales mix skewed towards high-margin products and exports helped improve operating profit margins by 350 basis points to 11.2 per cent. Export volumes jumped 109 per cent y-o-y and gross realisations on exports at Rs 3.5 lakh are much higher than domestic realisations. With exports now accounting for 15 per cent of turnover from 9 per cent from a year ago quarter, Maruti Suzuki is sitting pretty on this count. However, with the government subsidy on the purchase of a new car coming to an end, sustaining sales volume in the 18-country European market that it has created will become difficult. The company is eyeing 26 alternative non-European nations to maintain its sales growth. An area of concern would be the increase in raw materials costs which coupled with relatively lower volumes post festival season will make it difficult to maintain these margins.

Outlook
While on most counts the company is way ahead of competition there are certain concerns. The possibility of removal of excise breaks now that the domestic economic revival is strong could deflate demand. If interest rates go higher and considering that credit sales have increased from 62 per cent last year to 71 per cent now could have an impact on Maruti’s volumes going ahead. A stronger yen could also increase import costs though some of it is taken care of by higher export earnings and hedges. Considering that Maruti’s average forward P/E over the last six years is 14 and the stock at current levels is trading at 16 times 2010-11 estimated earnings, there is little upside expected from these levels.