Despite Q1 miss, multiple triggers ahead for Maruti STRONG VOLUME GROWTH

Dealer compensation and sales promotion costs dented performance

Maruti Suzuki’s June quarter (Q1) performance was lower than the Street’s expectations across all parameters. While volume growth at 13.2 per cent year-onyear (y-o-y) remained strong, growth in realisations or average selling prices per vehicle was at a mere three per cent.

Sequentially, the numbers were muted, with volume growth of five per cent and fall in realisations by about nine per cent. Net sales stood at ~17,132 crore, up 16.7 per cent y-o-y, but down nearly five per cent over the March quarter. This was lower than the consensus estimates of ~17,594 crore.

The results were impacted by a couple of one-offs. First, the company had to make up for the losses dealers suffered on account of taxes paid on stocks but credit for which was not available after the goods and services tax (GST) regime came into force. The company believes its impact would be around 50 basis points. Second, costs incurred due to sales promotion undertaken to reduce stock ahead of the GST’s implementation, with the impact being pegged at about 30 basis points.

This, coupled with higher raw material costs, impacted operating profit margins. Despite healthy revenue growth, operating profit was up five per cent y-o-y and lower nine per cent sequentially at ~2,331 crore. Raw material costs as a percentage of sales were up a sharp 270 basis points to 71.6 per cent y-o-y. The management expects raw material costs to remain steady and does not intend to raise prices to absorb the costs. It is looking at improving productivity and reducing costs to mitigate pressures.

Given the one-offs and higher costs, operating profit margins were down between 60 basis points and 150 basis points, both on a sequential and y-o-y basis, at 13.6 per cent. Else, the margins could have matched the consensus estimates of 14.2 per cent. At the net level, despite a tax write-back and a 42 per cent increase in other income, profits grew 4.4 per cent y-o-y to ~1,556 crore, lower than the estimates of ~1,692 crore.

However, there are certain triggers that will keep margins elevated, such as the volume growth, given the successful launches of the Ciaz, the Brezza and the Baleno with a waiting period of 16-20 weeks. With normal monsoons expected to boost rural consumption, pay commission pay-outs and lower financing costs are also likely to perk up volumes. The expanding proportion of high-value (premium segment) vehicles should improve average selling prices and profitability. Volumes of the fastest-growing segment, utility vehicles, are up 45 per cent y-o-y in Q1. It constitutes 15.5 per cent of sales, from 12.2 per cent a year ago. The ramp-up of the Gujarat plant, too, is expected to boost utilisation as the current facilities at Gurugram and Manesar are already operating at full capacity.