Maruti Suzuki India Limited has started the fiscal year 2013 on a sluggish note. Sales volume declined 6% year-on-year in April, which was worse than expected.
Semiconductor shortage, due to which the automaker could not produce around 270,000 units in FY12, will have a mild impact on production in FY13, the company said in its March quarter (Q4FY22) earnings call. Lower production, lower margins (at 6.5%), and higher working capital meant negative free cash flow in FY22.
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However, demand is healthy, as evidenced by the current order book of over 320,000 units, an increase from 268,000 units at the end of the fourth quarter. It also reflects somewhat less production due to lack of supply.
“Despite higher vehicle and fuel prices driving up ownership costs, we see less risk of demand decline in passenger vehicles (PVs). Historically, demand has shown a much higher correlation to GDP growth than cost of ownership,” analysts at Jefferies India said in a report on April 29.
Maruti’s standalone revenue up 11% in Q4 26,740 crore, volumes declined 0.7% due to hike in prices and lower discounts. The year-over-year and sequential expansion in EBITDA margins led by improved operating leverage increased 79 basis points (bps) and 237 bps to 9.1%, respectively, surpassing Bloomberg’s estimate of 8.2%. One basis point is 0.01%. Fixed commodity costs also aided the sequential growth in margins.
It remains to be seen whether margins can sustain at these levels given the cost pressures. “Exports have supported Maruthi Suzuki’s margins and as such, increasing the share of exports will be important,” said Varun Baksi, analyst at Nirmal Bang Equities. Maruti’s exports accounted for 14% of the total volumes in FY22, up from 7%. FY21. The company’s total volume in FY 2012 was 1,652,653 units.
Maruti expects the cost to increase in Q1FY23. The management said the precious metal prices are cooling down but the concerns about steel prices remain.
Against this background, margins are expected to decline in the first half of FY13, followed by an improvement in the second half of FY13.
Meanwhile, higher fuel prices have led to an increased preference for compressed natural gas (CNG) vehicles. 40 per cent of the pending orders are for CNG vehicles.
HDFC Securities’ institutional research analyst Aniket Mhatre said Maruti’s shares trade at 23.9 times FY24 estimated earnings, which is cheap compared to its growth potential. True, the loss of market share in the PV segment is a matter of concern. “The company is likely to regain its previously 50% market share in PV from 44% currently on the back of a strong product pipeline, which will help re-rate the stock,” Mhatre said.