Stock Review: Maruti Suzuki

 

THE domestic consumption story drove the benchmark indices all through the last financial year, as demand persisted despite rising prices.

Tata Motors gave returns of almost 65 per cent to shareholders, as auto demand remained robust throughout. However, all indicators point to a slowdown in consumer discretionary spends, as high interest rates and inflation are beginning to erode consumer sentiment.

While most automakers had been denying it so far, Maruti today acknowledged it was seeing a fall in the footfall conversion ratio. In a conference call with analysts, the management of Maruti Suzuki said they were seeing stress in the system as fuel prices had gone up seven times over the last year and the cost of ownership was steadily rising, too.

Given that 75 per cent of passenger cars sold in India are financed, a steady rise in rates is finally depressing consumer sentiment, even as the demand in the fourth quarter remained robust.

Also, with profitability already under strain due to the rising commodity prices, a dip in demand will make matters worse.

For the quarter ended March 31, the company registered a total income (net of excise) of `10,212 crore, an annual growth of 19.1 per cent. However, revenues grew by 6.12 per cent sequentially. The growth in net profit tells the stress story much better, claim analysts. The company's net profit grew by 0.5 per cent annually to 659 crore. On a sequential basis, it grew 16.75 per cent. Clearly, profitability has come under pressure for a host of reasons, starting from higher commodity costs to currency issues.

The company's profitability took a hit in FY11 due to the strengthening of yen, the Japanese currency. Going forward, the management says it has hedged 40 per cent of its yen exposure for the new financial year, providing some cushion for the bottomline. Like last year, the company's capital expenditure in FY12 is on the higher side at `4000 crore, which will come down by FY13. However, there isn't enough clarity on how the Japan crisis will impact the automaker's supply chain. While the management maintains they have no indication of any disruption from suppliers, analysts believe the automobile supply chains are far more complex. However, if demand slows down, as is expected, average discounts may go up from `10,500 last financial year. In the event of a rise in fuel prices, analysts believe the company would fare better than rivals due to its low cost of ownership and fuel efficiency.