Stock Review: MARUTI SUZUKI

The results of Maruti Suzuki, the leading four-wheeler player in the country, for the March 2011 quarter were above consensus estimates. The company's operating profit margin declined 300 basis points year-onyear to 10%, while total operational income rose 18.9% to . 10,092.2 crore.

As anticipated, higher raw material costs like steel and nonferrous metals impacted Maruti's operating margins in the quarter. The company's management also highlighted higher R&D costs in the fourth quarter, which again affected margins. These cost increases offset the marginal increase in net realisations on a YoY basis per vehicle in the quarter under review.

As a result, its net profit at . 659.9 crore in the fourth quarter was flat on a YoY basis, but better than the street's expectations.

In contrast, during the first nine months of FY11, its net profit fell by 11.6% YoY. The company management also highlighted till now, they have not been adversely affected by the recent quake in Japan and there has been no disruption to their production schedule. The stock rose 1.5% to . 1,326.6 on Monday. Maruti Suzuki had hiked prices for its models in April but it remains to be seen if that would help the company offset raw material costs, which have not shown signs of easing. Besides, the R&D costs are expected to go up, as the company develops new models. Also, rising auto finance rates are a dampener for the broader auto sector.

The company's market share of nearly 45% in the passenger vehicle market at the end of March 2011 was marginally higher than a year earlier.

The growth momentum for vehicle sales came largely from the first three quarters of FY 11, although total vehicle sales rose by 19.5% YoY in the fourth quarter. Maruti Suzuki trades at a P/E of nearly 16.8 times on a standalone basis on a trailing four quarter basis. We are neutral on this stock.