Maruti: Margins swing up

Given the strong turnaround in profitability, it wasn’t surprising that the Maruti Suzuki stock surged 6 per cent on Thursday. A better product-mix with a good share of diesel vehicles and higher exports have resulted in India’s biggest car company turning in a strong revenue growth of 34 per cent to Rs 6,340 crore in the June 2009 quarter.

The Rs 20,455-crore firm’s vehicles have clearly fetched it good realisations though volumes were up just under 18 per cent. With costs under control, the operating profit margin, at 12.2 per cent, is back to the levels where it was a year back, while there has been a jump in the margin of nearly 400 basis points sequentially.

With a pan-India presence and more than a 50 per cent market share, it’s possible Maruti’s volumes could increase by about 11-12 per cent in the current year, driven by models such as the Ritz and the Swift in the home market and the A Star in the export market. While there is no doubt competition from multinationals across segments, the company enjoys strong brand loyalty and has managed to cash in on the growing demand in semi-urban markets.

In the process, it has gained market share in the passenger car segment of over 250 basis points in the last few months. Since Maruti is clearly able to earn good realisations, especially on diesel cars, it’s possible, its revenues could grow by about 20 per cent in the current year.

With raw material costs expected to stabilise, it should not be too difficult for the company to sustain operating profit margins at levels of 12 per cent though adverse movements in the currency could hurt. The stock has run up sharply in the past few months gaining 66 per cent since April. At the current price of Rs 1,296, it trades at just over 20 estimated 2009-10 earnings and is not cheap.