Improved average realisation to drive Maruti Suzuki’s earnings growth

MUMBAI: The contraction in operating margin of Maruti Suzuki India due to a stronger yen against the dollar in the June 2016 quarter was largely expected by analysts. The unknown factors were the impact of new accounting norms on other income and the effectiveness of a better product mix. While the product mix resulted in higher than expected realisations, other income, too, was more since investments made by the company in mutual funds are now accounted at fair market value under the new accounting norms.

This lends more confidence to investors that nearly 30 per cent earnings growth is achievable in the current fiscal and also justifies nearly 20 per cent increase in the stock price from the previous quarter’s results.

Maruti’s revenue increased 12 per cent year-on-year in the June quarter at a time when volume growth was limited to just 2 per cent as fire at one of its vendor’s plant halted production. The revenue growth therefore reflects higher realisation due to rising proportion of higherpriced vehicles such as Baleno, Vitara Brezza and Ciaz.


The average realisation grew 9.8 per cent to Rs 4.2 lakh per vehicle. Maruti recorded 153 per cent year-on-year growth in the the total vehicle sold increased to 12.2 per cent in the quarter as against 5.1 per cent in the same quarter of the previous fiscal.

The operating margin in the June quarter dropped by 165 basis points year-on-year to 14.8 per cent due to unfavorable currency movements. Nearly 15-16 per cent of the total cost of Maruti is linked to the Japanese yen, hence Yen’s appreciation against the dollar impacted company’s margins.

With margins expected to shrink or remain at around the June quarter figures, earnings growth will be driven by the degree of improvement in average realisation. The volume growth in FY17 is expected to be 13 per cent due to capacity constraints The company said in a post-earnings conference call that it has taken steps to increase the capacity for Baleno and Brezza. Both of these vehicles are having 6-9 months of waiting period.

Analysts expect the two car models to contribute 14 per cent of total sales in FY17 as compared with 7 per cent in FY16. At the Tuesday’s close of Rs 4,485, Maruti’s stock is trading at 19 times its projected earnings of FY18 which is higher than its longterm average of 16. The stock is likely to be an outperformer due to higher earning visibility, one of the principal beneficiary of 7th Pay Commission wage hikes and gradual premiumisation of the passenger car market.