Maruti Suzuki: Low Profits Adding To Despair

The four wheeler industry has been seeing a slowdown since the beginning of FY12 which has further deepened starting FY13, largely affected by soaring fuel prices and high interest rates. Maruti Suzuki India Limited (MSIL), the market leader in four wheelers, has been in the radar lately over these two years, for issues beyond the overall slowdown in automobiles. They have been in the news several times over production halts, thrice in the previous year and once this year. The violent incident at the company’s Manesar plant has resulted in a lockdown at the facility, resulting in huge amounts of loss with the festive season coming up, where demand peaks.

*due to a lower base

Q1 FY13 was not a favourable quarter for auto makers with many of them halting production to avoid inventory pile ups. Moreover, there was a drastic shift in the demand for passenger vehicles, from petrol cars to diesel cars. This took a toll on all auto makers and has been reflected in sales volume figures. In Q1 FY13, MSIL sold a total of 2,95,896 vehicles, which is a growth of 5.10 per cent as compared to the 2,81,526 vehicles sold in Q1 FY12. The company’s domestic sales were up by 5.02 per cent and exports by 5.80 per cent. These growth figures are significantly lower than the growth figures for total sales of vehicles which are 9.71 per cent for domestic sales and 14 per cent for exports of passenger vehicles.

The sluggish sales volume growth figures have not affected the topline of the company with MSIL announcing the net sales for Q1 FY13 to be Rs.10,529.2 crore against the Rs.8,256.6 crore in Q1 FY12, registering a growth of 27.52 per cent. However, the margins of the company have been severely affected due to higher input costs as a result of a depreciating rupee against the yen. In FY12, 11.99 per cent of the raw materials consumed by MSIL had been imported. This figure is way higher when compared to other big players like Tata Motors and Mahindra & Mahindra. These pressured margins can be seen with the -3.45 per cent and -22.84 per cent change in the operating profit and the net profit of MSIL. The operating profit and the net profit of MSIL stood at Rs.786.29 crore and Rs.423.77 crore respectively in Q1 FY13. The Operating Profit Margin and the Net Profit Margin of the company have reduced by 225 bps and 241 bps respectively, standing at 7.29 per cent and 3.89 per cent.

The festive season is bringing cheers to auto makers with demand expected to peak. Companies have lined up new models to be launched so they can fuel the opportunity of growth. MSIL could also use the opportunity to see a bounce back but the Manesar plant shut down is costing the company the lack of production of approximately 1500 units per day. With this, supply of cars is going to come under tremendous pressure with waiting period for models like Swift and Dzire already going up to as much as 6 months. These two models are the most selling cars in the industry and are manufactured at the Manesar plant. Recent incidents will hamper the production and sales of MSIL to a large extent. It will have an effect on the volumes and financials of the coming two quarters.

The stock prices of MSIL have seen a depreciation of 8.51 per cent since the outburst at the Manesar plant. The markets seem to have captured the immediate effect of the plant lockdown, which can be seen from the 0.86 per cent rise regardless of the 22.84 per cent drop in net profit. The picture would be hazy till the time the company doesn’t resume production and get back on track, also accounting for the backlog. Volume figures and financials for Q2 FY13 and Q3 FY13 figures wouldn’t be as disappointing relative to the corresponding quarters in the previous year because the company had suffered a 33 day strike commencing 29 August 2011 and a 14 day strike in October 2011. We recommend investors to avoid investing in the stock till there is news of commencing production at the Manesar plant again or execution of any alternate plans to cover up for the lost production time.