Maruti Suzuki: Recent launches, rural markets key triggers

Strong realisations and volume growth helped Maruti beat expectations on most parameters for the March'16 quarter. Volumes would have been higher but for the reservation agitation by Jats in Haryana. A product mix skewed towards higher value premium vehicles such as Ciaz, S-Cross and Baleno helped the company post 12.5% jump in realisations, which coupled with 3.9% growth in volumes helped overall revenues grow 12.5%.

While the S-Cross was launched in August 2015, the new Baleno was put on sale from October, and Ciaz over a year ago. Realisations could see incremental gain post the launch of the Vitara Brezza in March 2016. While compact segment sales (Swift, Ritz, Dzire, Celerio and Baleno) are the largest volume generator and constitute half of Maruti's domestic passenger vehicle sales, the company's erstwhile bread and butter, the mini segment (Alto, Wagon R), continues to see a declining trend. Both these trends help in improving product mix by value and thus aid realisations.

The other highlight was the margins. These fell 60 basis points year-on-year to 15.7% whereas analysts' were expecting it to fall between 60-140 basis points on the back of 10% yen depreciation against the dollar and higher spends on promotions. While higher than expected sales helped, a 190 basis points fall in raw material costs as a percentage of sales limited the damage. Import costs and royalty payments account for about 22% of sales and an adverse currency movement impacts Maruti's performance. This could also improve if the company is able to increase the local content going ahead, as per its plan.

A 62% drop in other income to Rs 121 crore and a 27% increase in taxes to Rs 556 crore led to a 11.7% fall in net profit at Rs 1,133 crore, lower Bloomberg consensus estimate of Rs 1,188 crore. Nevertheless, the strong operational performance saw the stock gain 3.6% on Tuesday.

Going ahead, while industry body SIAM has cut passenger vehicle growth to 6-8% in FY17 due to higher taxes in the Budget, Maruti expects to grow its volumes by 10%. Given the expectation of a favourable monsoon, the biggest boost could come from rural markets (35% of Maruti's FY16 volumes). The implementation of 7th Pay commission should also help. While it has a strong portfolio of brands, uptick in commodity prices, continuation of high discounts and adverse currency movement are key downside risks. Also, given higher marketing spends on new launches and expansion of the Nexa channel, expect a bit of pressure on margins.