Maruti: Bumpy ride ahead

Stiff competition and rising input costs have affected margins and earnings outlook.

Maruti closed the year phenomenally in terms of volumes and sales growth, but saw margins shrink on a sequential quarterly basis, as rising input costs dented the bottom line.

In 2009-10, sales volume grew nearly 29 per cent year-on-year to over one million cars and net sales jumped 42 per cent to Rs 28,959 crore (Rs 289.59 billion).

Earnings before interest, tax, depreciation and amortisation (Ebitda) margins expanded by 470 basis points to 13.7 per cent and net profit more than doubled to Rs 2,498 crore (Rs 24.98 billion).

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The twin concerns of rising input costs and competitive intensity in the space took its toll on Ebitda margins (to net sales) for the quarter, which dipped 200 basis points sequentially to 13.5 per cent even as volumes grew 11 per cent. Net sales surged 12 per cent to Rs 9,119 crore (Rs 91.19 billion) during the period.

Material cost to net sales ratio rose to 77.9 per cent compared to 76.2 per cent in the December quarter, although about half of this was due to upgrades of vehicles to BS-IV emission norms, according to a Citibank research report.

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It has seen overall market share dip about 430 basis points sequentially to 46.5 per cent in the March quarter.

The management is hopeful that competitive pricing and rural thrust will help drive sales enough for it to regain lost ground. It has also announced a capital expenditure plan to raise capacity to 1.5 million units by June 2011.

Analysts, however, foresee rising margins and bottom line pressures in the medium term, given rising commodity prices.

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"As a consequence of higher prices of new raw material contracts and strong competition in the passenger car segment (that may not allow the company to go in for significant price hikes), we expect the overall margins to dip by 85 basis points year-on-year in 2010-11," says a Sharekhan report.

The stock has dipped from Rs 1,361 pre-result levels to Rs 1,270 on Wednesday and currently trades at about 13.5x consensus analyst earnings per share estimates.