Maruti: Positive triggers in place

Wage hike impact negligible, but rupee appreciation and new launches will help recoup lost market share

Even after announcing a 50-75 per cent hike in wages for permanent employees in the Gurgaon plant, Maruti Suzuki’s stock price has stayed flat. This is because the wage hike will have negligible impact on the company’s margins. In FY12, wage cost as a percentage of sales was 2.4 per cent and automobile analysts expect this to continue this financial year, too.

The wage hike is applicable to the 2,700 permanent workers at Maruti’s plants in Manesar and Gurgaon. Though the wage hike is front-loaded, with 80 per cent of the hike to be given in FY13, the impact on operating margins will be negligible, as the company is planning to undertake price hikes starting October to offset this wage hike.

Along with the wage hikes, analysts also expect Maruti to improve productivity. Even if the company were to double wages, wage cost as a percentage of sales would move up to only four per cent. The big bonus is that the salary revision implies an end to labour woes for Maruti. This will help the company recapture its market share in the domestic auto market.

The company’s market share stayed steady at 43 per cent in the first four months of the year but fell to 27 per cent in August after the strike at Manesar. Given the strong bias customers have for Maruti products, analysts expect the company to recoup its lost market share. Deepak Jain, auto analyst at Sharekhan, believes Maruti is the preferred player as it seems the most prepared to ride the diesel car boom. The company plans to launch an entry segment 800cc car around Diwali and new CNG-petrol variants across products and this, Jain believes, would help Maruti outperform other auto manufacturers given the very low inventory and the 130,000 order bookings for the new Swift.

The other trigger for the company’s shares is the recent appreciation in the rupee. The rupee has strengthened against the Japanese yen in the last 10 days, positive for the company’s operating margins. HSBC Global Research says further depreciation in the yen vs the rupee could provide further upside to the earnings before interest, taxes, depreciation and amortisation (Ebitda) margins in FY14. “We drop our 20 per cent discount to DCF value (owing to recovery in operations at the Manesar plant) and now value the company at Rs 1,450. We revise our FY13 estimates by -10 per cent (accounting for lost sales due to plant shutdown) and FY14 estimates by three per cent (factoring currency benefit),” the brokerage says in a note.