Realisations, volume growth buoy Maruti’s Q3

Profit was below estimates on lower other income and higher tax rate

Maruti’s December-quarter numbers at the operating level were in line with estimates, led by an 11.3 per cent year-on-year (y-o-y) increase in volumes. This, coupled with increased realisation from higher value models, helped the company report a 13.9 per cent growth in net sales during the reporting quarter at ~189.4 billion.

Volume growth was led by a 27 per cent jump in sales of the compact segment, which accounts for 45 per cent of the overall volume. The segment includes vehicles such as the Baleno, the Ignis, the Dzire, and the Swift, with some of them on waiting period. The growth momentum is expected to continue on product launches such as the all-new Swift, which is slated to go on sale in February. Rural sales growing at a robust pace and a 20 per cent increase in overall footfalls in the quarter point to a steady volume growth.

The company, however, did better-than-expected at the operating profit level. Higher revenues, coupled with cost reduction and lower sales promotion expense, helped it improve operating profit by 22 per cent to ~30.37 billion. While raw material costs as a percentage of sales went up by 10 basis points (bps) to 70.3 per cent, the firm managed to bring down other expenses and employee costs by up to 80 bps, offsetting higher commodity pressures. Margins for the quarter at 16 per cent were 100 bps higher than the year-ago quarter.

While input costs have been passed on by a marginal increase in prices at the start of the year, Maruti’s management pointed out that higher raw material costs will remain a pain point in the March quarter. This could lead to pressure on margins as the small hike in prices in January is not enough to absorb the pressure on the commodity basket.

On the costs front, the Street will keep an eye out for changes to royalty paid to Suzuki Motor Corp. Maruti Suzuki’s board has approved a revision in the method of calculating royalty that would result in lower payments for new model agreements, starting with the Ignis which was launched in January 2017. Royalty as a percentage of sales in the December quarter stood at 5.3 per cent.

Net profit for the quarter at ~17.99 billion was up just three per cent and was below estimates of ~20 billion. Fall in other income, given the mark-to-market losses the company had to book on its invested surplus, lower R&D benefits and higher tax rate, led to the disappointing bottom line. While sales growth is expected to be strong, the final rates of royalty, commodity price impact and uptick in production at Gujarat plant are key factors that will decide the stock movement.