Latent demand, new launches to aid Maruti's volumes in FY15

Operating margins decline to 10.3% in March quarter on one-time payouts but may recover to 12% in FY2015

Maruti Suzuki India Ltd’s fourth quarter and full year numbers (FY14) suggest the automobile industry continued to battle weak demand for a third straight year. The sharp fall in share of first-time car buyers hurt Maruti’s FY14 car sales. Though its rural sales grew 16 per cent, the headline number declined. Maruti’s volumes declined 1.4 per cent to 1,155,041 units in FY14, compared to the year before. While domestic volumes grew 0.3 per cent to 1,053,689 units, exports declined 16 per cent to 101,352 units. Net sales in FY14 stayed flat at Rs 42,644 crore, while fourth quarter sales declined 9.48 per cent to Rs 11,818 crore.

Sequentially, however, there is an improvement in volumes and sales. Compared to the third quarter, standalone sales, including other income, grew 11.1 per cent to Rs 12,101 crore, largely driven by volume growth of 12.7 per cent. But this volume growth has come at a price, as margins contracted. Maruti took a hit as it passed on benefits of lower excise duties to dealers, who were sitting on four weeks of inventory. The company took a hit of Rs 143 crore on account of this payout.

Maruti's operating margins have declined 213 basis points sequentially to 10.3 per cent, largely on account of this dealer compensation and higher sales promotion to boost weak demand. Sequential increase in raw material costs also impacted margins. Angel Broking’s Yaresh Kothari says the negative margin surprise was primarily due to the dealer compensation and employee expenses, which increased significantly 33.8 per cent quarter-on-quarter.

The contraction in margins had a direct impact on the bottom line. Maruti's March quarter net profit declined 35.46 per cent year-on-year to Rs 800 crore. For the full year, however, the net profit grew 16.3 per cent to Rs 2,783 crore, although volumes and sales remained flat. The gains have been driven largely by improved efficiency, a localisation drive and positive currency movement. While Maruti has brought down the share of imported content from 19-20 per cent to 16 per cent, analysts say further gains are limited. After the fourth quarter blip, analysts expect Maruti's operating margin to return to 12 per cent levels in FY15.  Over the past six months, the stock has risen 30 per cent. However, Surjit Arora of Prabhudas Lilladher believes there is some upside left, as volumes could grow at a compound annual rate of 12 per cent over FY15-16, as there is latent demand in the market and the company has two new products ready for this year. Maruti is currently trading at 14.5 times its FY16 earnings but if automobile volumes recover, this could expand to 16x.