Stock Review: MARUTI SUZUKI

MARUTI Suzuki India's December 2010 quarter results highlight the difficult operating environment for the automobile sector due to rising input costs and the inability of carmakers to fully pass them on. The company's operating profit margin dropped 560 basis points year-on-year to 9.5% in the third quarter, although net sales rose 26.2% to . 9,494.5 crore. The results were below analysts' estimates. The pressure on Maruti's operating margins was due to its adjusted raw material costs as a percentage of net sales that increased 360 basis points year-on-year to 74.9% in the third quarter. The company has taken steps to offset the rising metal costs through improved productivity measures, but it has had to grapple with an adverse exchange ratio of the Japanese yen for imports from there. That apart, the company also grappled with higher royalty payments to its Japanese partner during the quarter. Analysts estimate that the company's royalty and technical expenditure amounted to nearly 5.2% of its third-quarter net sales, which, if true, is significantly higher than the year-ago numbers. Maruti Suzuki's royalty and technical fees aggregated close to 3.5% of its net sales for the year ended March 2010.

   This had an impact on its bottomline with net profit down 17.8% to . 565.2 crore in the quarter. The results were announced on Saturday and on Monday, the stock did manage to recover and close 1.6% higher at . 1252.8. Analysts reckon it could be value buying in the stock, considering the 52-week low, which the stock registered in late January.

   In the near and medium term, the underlying concern for Maruti Suzuki and other players in the sector remains the rising costs of key metal inputs. Besides, there is no certainty with regard to the direction of exchange rates for the Japanese yen and its potential impact on Maruti Suzuki. Auto finance loans are also headed northwards, which could impact sales volume growth for the broader auto sector over the next few quarters, say analysts. The other concern is higher royalty fees to its parent, which could continue to crimp operating margins for Maruti Suzuki in the near term.

   India's largest car manufacturer had raised prices across its various models in late January, but it remains to be seen if that would be sufficient to cover the higher input costs over the next few quarters.

   Maruti Suzuki trades at a P/E of 15.9 times on a trailing four-quarter basis and it factors in the company's growth prospects over the near term. Other large auto players such as Tata Motors trade at a consolidated P /E of 10 times on a trailing basis.