Maruti: Operating profit margin strong and rising

Better volumes, high acceptance of recent launches raise operating margin, offset forex fluctuations

Even before festive demand kicks in, the September quarter (Q2) turned out the best in recent times for Maruti Suzuki. Net revenue (which is sales minus excise duty) grew 30 per cent over a year ago to Rs 17,595 crore. Net profit grew 60 per cent over a year ago to Rs 2,398 crore, exceeding Bloomberg consensus estimate of Rs 1,765 crore. Other income of Rs 813 crore, up almost two-fold over a year ago, also topped expectations. But volume-led revenue growth played a larger role in Q2, offsetting foreign exchange fluctuations.

Operating profit margin at 15.8 per cent, up 125 basis points over a year ago, showed high consumer acceptance of recent launches in super compact and utility vehicles categories, with utility vehicle Vitara Brezza contributing more to margin expansion than super-compact Baleno. Brezza's volumes grew 150 per cent and accounted for 14 per cent of total volumes in Q2. Waiting period for Baleno and Brezza means no discounts; this contrasts with industry-wide discounts to attract sales. Analysts say if Maruti can keep Brezza and Baleno going, and improve offering in premium segment, margin expansion may continue. Also, Maruti's dependence on small cars is gradually reducing and now stands at 30 per cent as against 40-43 per cent of total volumes two years ago. This would also result in higher operating profit margin for Maruti.

Also, acceptance of recent launches is keeping sales and promotion expenses in check. These two expenditure heads are part of other expenses, which, after increasing 20 per cent in FY16, were up 15 per cent to Rs 221 crore in FY17Q2 over a year ago. Also, longer waiting period (four-six months) for automatic manual transmission models, Swift, Baleno, and Brezza suggest optimal plant use, critical for improvement in operating profit margin.

Prayesh Jain of IIFL Wealth Management says judge operating profit margin once Gujarat plant starts in March 2017 quarter. "Gross margins may remain strong, but operations at a new plant, which would also cater to exports, could be vulnerable to higher fixed costs in initial stages, putting pressure on operating profit margin," he says.  

That said, despite the sharp stock gain of 27 per cent this year, analysts expect further re-rating given a buoyant Q2 ahead of festive season. Maruti trades at 28 times its FY17 estimated net profit.