Small BusinessMaruti: Goldilocks moment
Low interest rates, a revival in auto financing and strong spending based on improved sentiment boosted auto sales this year so far. This sales momentum should sustain going ahead as per most market analysts and the sector has seen earnings estimate upgrades all around.
The environment has seen Maruti reinforce its leadership position (52.2% market share of passenger vehicle sales in FY09) and gain substantially from four new model launched in the last 18 months. Analysts expect Maruti to see sales growth of about 13.8% CAGR over the next two years as per an Icici Securities report.
All other parameters look extremely comfortable for the company. Domestically, rural and public sector employee spend is helping sales and have steadily grown to about 13% of sales in Q2FY10 from 4% and 8% levels end September 09. Its model launches tap all segments of high volume important 2-5 lakh market. Easy financing conditions have also boosted car sales and financed sales comprise over 70% of total sales compared to 60% in Q3FY09, according to Icici securities.
Exports were also up dramatically in Q2FY10 (570 bps y-o-y) and make up 15% of total sales. Exports to the EU zone increased partly because of the scrappage incentives offered in some EU countries. This, however, is for a limited period and therefore the growth may be capped to an extent. However, the impact to EPS will be limited, as per a BRICs report, as exports to other countries are increasing.
Healthy operations
Consolidation of platforms and shift in engine production should help save costs and allow production flexibility. Sales were up nearly 47% y-o-y to Rs 7050 crore against a sales volume growth of 30%. PAT was up 92% to Rs 570 crore with operating profits up 78% to Rs 916 crore.
While there has been a 230 bps improvement in operating margins in Q2FY10, costs pressures will come into play as inputs costs have gone up (especially steel and aluminium). Hardening Yen is another key worry as Japanese imports account for about 10% of total raw materials and nearly 8% of sales according to Icici. Additionally, 50% of royalty payment, about 3.5% of net sales, is payable in Japanese yen.
Maruti operates on negative working capital and has healthy cash flows. Icici expects that it will incur about Rs 3300 crore in capex to upgrade manufacturing facilities and in research and development expenditure. This should be financed entirely through internal accruals as the company is expected to generate cash-flows of about Rs54bn over the next year, as per Icici estimates.
The stock closed at Rs 1599.40 on 24 November 09 and was up 2.65% in the days trading. It currently trades at a P/E valuation of 16x FY11 Consensus analyst EPS estimates.