Maruti: Worst is over, volumes to pick up in festive season

The second quarter was expected to be a tumultuous one for the country’s largest passenger carmaker, Maruti Suzuki India Ltd. But the company surprised the market with its second-quarter (Q2) numbers. While net profit declined 5.4 per cent to Rs 227 crore compared to the previous year, net sales increased 8.5 per cent to Rs 8,070 crore and margins did not decline as sharply as expected. Where the company has really sprung a surprise is at the operating level. Given that volumes were down sharply due to the strike at Manesar, the market was expecting operating margin to dip to 5.5 per cent levels. The company, however, has reported operating margin at 6.2 per cent compared to 7.3 per cent in the first quarter and 5.7 per cent a year ago.

The company opened the September quarter with a lockout at its Manesar plant in Haryana. The plant, on an average, produced 1,600 cars a day. So, this quarter was expected to be a washout for the company, but Ertiga sales and higher export realisations prevented a sharp deceleration in operating margin. Ertiga also propped up average realisation, which went up nine per cent. Another positive this quarter has been a beneficial currency movement, which also helped prevent margin erosion, says Yaresh Kothari of Angel Broking. The company’s royalty payout is down 60 basis points year-on-year to 5.4 per cent in Q2.

Going by the good set of numbers, it appears the worst is over for Maruti. Having settled the wage issue with employees, the company is now free to focus on business. Given the market’s preference for diesel cars, the company is well placed to cater to the wait list of 125,000 vehicles. Surjit Arora of Prabhudas Lilladher expects the company to clock volumes of 120,000 a month in the coming months.

The festive season is expected to see a pick-up in demand. The second half will boost Maruti’s profitability. Arora believes the second half of the year will account for 65 per cent of the full year’s profitability. The company has also conveyed that the effective tax rate will be 20 per cent in FY13, which will also help boost profitability in the second half. The stock currently trades at 13 times its forward earnings. Analysts expect that after the second quarter numbers, upgrades are likely.