Margins and volume growth to keep Maruti in fast lane

Despite hovering around its record high, shares of Maruti Suzuki may be left with some tailwind -a reason why many MNC brokerages have raised their target prices post results.There are two triggers for upward revision of earnings estimates: margin expansion and volume growth.

India's largest carmaker closed June quarter with the highest ever operating margin of 16.7% thanks to softening commodity prices, favourable yen-dollar exchange rate (21% of Maruti's components are yen denominated import), increasing share of higher priced cars and falling average discount per vehicle.

Analysts are factoring in operating margin in the range of 1617% in the current and next fiscal year. This may be revised upwards by 75-150 basis points with commodity prices likely to stay low. The raw material spent per unit of car dropped by 3% to Rs 2.64 lakh in the June quarter from Rs 2.72 lakh a year ago.

The company has recorded 19% growth in the sale of petrol cars (which carry a lower discount) against a flat growth in diesel cars. Also, incremental volume growth is coming from new models such as Celerio and Ciaz, where discounts are lower or non-existent. Both models constituted 10% of the total sales volume. Most expect a volume growth of 12-14% this year and the next (against 10% last fiscal). This could even be revised higher with an increase in salaries of government employees following the 7th Pay Commission award expected in Oct-November.

Sales to government employees account for 15% of total Maruti's sales. The company plans to launch five models this year.This would add to volumes as well to its reach among buyers.