Maruti’s margins shrink further in Q4; road ahead may not be smooth
PremiumNear-term margin pressures are a worry, and Street will closely watch the impact of the second covid wave on demand
This calendar year has begun on a rough note for Maruti Suzuki India Ltd. The company’s shares have declined as much as 20% from their 52-week high in January on the National Stock Exchange. Not without reason. The second covid-19 wave brings uncertainty as far as demand is concerned. Plus, investors are worried about the hit to profit margins, owing to rising cost pressures.
The automaker announced its March quarter results on Tuesday and analysts are disappointed about the firm’s profit margins, in particular. Ebitda margin for the quarter stood at 8.3%, down 120 basis points compared with the December quarter. Ebitda stands for earnings before interest, tax, depreciation and amortization.
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“This is due to higher raw material cost and the lag effect of price hikes to pass on cost escalation," said Mitul Shah, head of research at Reliance Securities. “It seems that the company’s price hikes so far haven’t been sufficient to pass on the full cost escalation to customers, as the demand environment is weak, coupled with higher competitive intensity," he added.
Sequentially, Maruti’s Ebitda declined about 11% to ₹1,991 crore. For perspective: analysts at Kotak Institutional Equities had estimated Ebitda at ₹2,264 crore, assuming profit margins will hold at Q3 levels of 9.5%. Maruti had fallen far short of the Street’s estimates on margins in Q3 as well.
The company’s net profit declined by 10% year-on-year to ₹1,166 crore. A Bloomberg poll of analysts had estimated Maruti’s net profit at ₹1,699 crore. Of course, another reason for this miss is the sharp drop in other income due to mark-to-market losses on invested surplus.
For the March quarter, Maruti’s operating revenues, though, have increased by 32% over the same period last year to ₹24,024 crore. The company sold 492,235 vehicles last quarter, which is a near 28% increase year-on-year. Out of this, domestic volumes at 456,707 units increased by 26.7% year-on-year while export volumes increased by 44% year-on-year.
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True, a favourable base helped as last year’s March quarter saw a considerable drop in sales volumes, largely owing to the covid-19 lockdown. Dolat Capital Market Pvt. Ltd’s calculations show that the company’s average selling price has risen 4.5% year-on-year and 4% sequentially.
After a lacklustre March quarter, the journey ahead will not be smooth. As mentioned earlier, near-term margin pressures are a worry. Investors will also closely watch the impact on demand of the second covid wave.
Competitive intensity is also rising. These factors are likely to weigh on sentiments for the stock from a near-term perspective. So far this calendar year, Maruti’s shares have declined by 14% compared to a 5% gain in the broader Nifty 100 index. However, from a medium-term perspective increasing consumer preference for personal mobility and rising affordability augur well for demand.
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