Maruti Suzuki: Earnings acceleration to continue

Pipeline of 14 new products for India and permission from parent to export to developed markets will drive growth

Growth is expected to remain elusive in the coming year, which is why companies that can improve their profitability will be much sought after. Equity strategists have identified margin expansion as a big trend in the coming year and companies able to do that, despite muted growth, will command a premium. If higher profit growth, despite muted sales, is the thing to watch out for, Maruti should definitely figure in a stock-picker’s list. Despite the sharp slowdown in the automobile industry, the company has beaten even the most optimistic earnings estimate on the Street.

Maruti reported an operating margin of 12.9 per cent in the second quarter, which has helped bump up the operating profit. The company exited FY13 with an operating margin of 9.8 per cent and is expected to end FY14 with an operating margin of 12 per cent. Analysts believe several measures taken by the company such as control on costs, improving rural presence and a better focus on exports will continue to drive its profitability in the coming quarters, too.

Currently, Maruti is present across only seven per cent of India’s villages while rural sales account for 30 per cent of its the total sales, and this will move up to 50 per cent over the next five years. India’s car penetration is at 15 cars for 1,000 people and in rural areas this ratio is half of metros. So, there is ample room for growth. This apart, the company is slowly encouraging vendors to indigenise components.

According to Credit Suisse, earlier the company used to compensate foreign exchange losses of vendors but now it is adopting a carrot-and-stick policy where vendors will themselves have to bear a part of the burden if they don’t achieve the desired level of localisation. This will even out earnings, which will not be as affected by currency movements as in the past.

Other than cost savings, the company has an aggressive product and go-to-market strategy for both India and abroad. At the Tokyo Motor Show, the company announced its plans to launch 14 new models over the next five years. The firm plans to start new launches from 2014. Suzuki has conveyed to investors in Tokyo its new product development will be on three new light-weight platforms. CLSA says the development of these platforms is complete and will launch products from 2014.

The other big boost for the company has come from its parent Suzuki, which has decided to let Maruti export to developed markets such as West Asia, Latin America and Africa. So far, Suzuki has been exporting made-in-Japan cars to developed markets, but will now use India, Thailand, Indonesia and Hungary as export hubs for all kinds of vehicles.