Stock Review: MARUTI Suzuki

Carmaker Maruti Suzuki's stock, which ended Monday's trade at . 1,096, higher by 1.4%, is hovering just above its 52-week low in late August. What is worrying investors is not just the ongoing labour strife in the company, but also the impact of a rising yen on the rupee.

That's because Maruti has hedged its yen exposure only till the end of the quarter to September 11. And this strategy comes at a time when the company's imports of components amounted to almost 7.9% of its FY11 standalone net sales of . 37,040 crore, while that of foreign capital goods was 2.3% of its sales.

There are other worry lines too. The company has to make royalty payments to its Japanese payments, coupled with imported dies and moulds. To deal with this forex problem, Maruti is focusing on enhancing indigenisation of its components and allied suppliers over the next few years. Concerns for the broader auto sector include rising auto finance rates and commodity input costs. Over the next few quarters, analysts reckon its operating margins could be under pressure due to these factors. The company's operating profit margins were broadly flat on a YoY basis at 9.5% in Q1FY12,

The current labour trouble at its facilities had adversely impacted its monthly sales. Its total sales in units in August 2011 fell by 12.7% YoY and that was attributed to the labour unrest at its facilities at Manesar, Haryana. In July, the company's total vehicle sales in units had declined 25.3% YoY and that was partly due to deliveries of the older Swift model being discontinued. This comes at a time when Maruti's total vehicle sales that already declined 0.6% YoY in the June 11 quarter. The company had also faced labour trouble in the June 11 quarter.
No doubt, the company is taking steps to restore normalcy at its production facilities, but the Street is concerned that labour troubles could dent the company's brand name in the domestic market. Maruti's share in the domestic passenger car market was estimated at 44.8 % in the June 11 quarter versus 47.6% a year earlier. Maruti, in the June 11 quarter, had lost market share to Korean auto players operating here.

A bright spot for Maruti is the strong customer response to its new Swift model and that should help revive the company's sales in the second half of FY12. In addition, its capacity of diesel engine-run cars is expected to increase shortly. These diesel cars have higher margins and that should provide a cushion for its operating margins over the next few quarters, in a rather difficult operating environment. Maruti trades at a P/E of 13.4 times on a trailing four-quarter basis.