Maruti Suzuki: Light at the end of the tunnel

The current financial year has been a washout for Maruti Suzuki. While the last quarter of FY12 saw sales of its petrol cars slump, this year’s labour woes at its Manesar plant will hurt volumes of its hot-selling diesel vehicles. The company is expected to report bad numbers for Q2 and it wasn't a surprise that it cut FY13 volume guidance to 1.19 million units, a year-on-year growth of five per cent. However, this is a known risk and brokerages have factored it in their views.

However, equity markets are typically forward-looking and if one discounts this year, then Maruti would look like an attractive bet. The company is a key beneficiary of currency appreciation but most of the benefit would flow in only next year, provided the rupee stays at these levels. For starters, the company pays 5.5 per cent of its revenues as royalty and has a 26 per cent exposure to imports, both direct and indirect. The rupee’s appreciation, therefore, is good news, as its payouts will be less.

Typically, companies hedge their exposure for the following quarter as well, so Maruti will see benefits of rupee appreciation from the fourth quarter. Deepak Jain of Sharekhan says the rupee’s appreciation benefits Maruti the most amongst the original equipment manufacturers, as the company’s royalty bill will reduce and the import of components from Japan will get cheaper. The company’s earnings per share (EPS) are expected to increase by 3.4 per cent on account of the rupee. The rupee has appreciated by 3.33 per cent against the yen year-to-date and most of Maruti's imports are yen-denominated.

Also, given the low base of this year’s volumes, FY14 would obviously show better growth. The launch of refreshed models like the new Alto will help boost sales. Citi says: “Maruti and competitors have hiked prices by one to two per cent across models — ostensibly to pass through costs but we think it's because companies sense that customers are returning to showrooms. Maruti’s refreshed Alto augurs well for volume growth over 2HFY13/FY14 — we don’t build in meaningful market share gains within this product segment but acknowledge this as a possibility.” Though there is a major slowdown in petrol cars, the new Alto will not come with any discounts in the first six months, which would help the company. At present, the discount on the Alto is close to Rs 20,000. Analysts expect FY14 to see a volume growth of 14 per cent and an EPS growth of 45 per cent.