Sales Trend After Strike Will Decide Road Ahead for Maruti Suzuki

Car maker Maruti Suzuki's performance for the quarter ended September 2011 has been weighed down by the recent labour strife at its unit in Gurgaon. The decline in operating margins, along with higher selling and distribution expenses and coupled with royalty payments to its Japanese parent, as a proportion of net sales in the second quarter of FY 12 compared to a year ago, did impact the company.

Its operating profit margin declined 420 basis points YoY to 6.3% in the second quarter of FY12 while its total operational income fell 14.4% to Rs 7,831.6 crore. No doubt, the company's average realisation per vehicle improved an estimated 6.4% YoY in the second quarter of FY12, but that was not good enough to compensate for higher operating costs in the quarter. Maruti's vehicle sales had also declined 19.6% YoY in Q2.




The fall in the company's net profit in the September quarter was steeper than the fall in net profit reported during the entire FY11 on a YoY basis. Its net profit had grown 18% YoY in the June 2011 quarter. The broader domestic four-wheeler passenger car segment has to now cope with the challenge of rising auto finance rates, which has started to bite.

The impact of this is reflected in the nearly 4.3% YoY decline in industry sales in this segment in the second quarter. Maruti's quarterly results were declared on Saturday and the stock declined 0.4% to Rs 1,123.5 on Monday. This stock is hovering above its 52-week low reached in mid-October.

For Maruti, the key to a turnaround in its financial performance will be a revival in its vehicle sales with the strike behind it now. The company says it has received bookings for over 100,000 units for its new Swift model. Apart from that, the Japanese yen traded close to its historic highs, prior to the latest intervention by Japanese authorities.

Analysts point to the fact that Maruti compensates its vendors for forex losses on the yen, related to meeting its components and allied needs from imported sources, with a one-quarter lag. As a result, vendor-related losses on the yen for the September 2011 quarter are expected to weigh on Maruti's December 2011 quarter result.

In a bid to deal with a rising yen, Maruti has also focused on enhancing its indigenisation levels over the next few years, coupled with its internal cost-control measures. Apart from that, commodity input costs remain a concern. The stock trades at a P/E of nearly 16 times on a trailing four-quarter basis.