Maruti Suzuki, which sells one of every two cars running on Indian roads, should continue to draw investors.
Its March quarter performance included several one-off expenditure items, but excluding those that wouldnt recur, profits at the countrys biggest carmaker exceeded Bloomberg consensus estimates by 7 per cent.Three line items in the March quarter financials chipped away at Marutis profits.
First, the company paid extra compensation for a land parcel it bought at Manesar in Haryana.
Of the total interest part of the land compensation worth 330 crore, the company accounted for an expense of 250 crore in the fourth quarter.
Second, other expenses rose 23 per cent YoY due to higher marketing spending on account of Auto Expo and the launch of the new Swift.
Third, employee costs rose 34 per cent YoY after Maruti paid the variable component of wages.Yet, Maruti could expand operating margins by 20 bps YoY to 14.2 per cent in March quarter.
The key reason for margin stability has been a gradual decline in the average discount per vehicle, which dropped to Rs 13,880 in the March quarter from Rs 17,900 in the previous quarter.
The continuous decline in the average discount level suggests improving consumer sentiment and lower push sales.The drop in the average discount level has contributed about 100bps to gross margin expansion.
The improved consumer sentiment could help the company pass on price increases when input costs move higher.
Also, better margins on the Vitara Brezza due to lower tool and die expenses resulted in a 50bps positive contribution to gross margins.Maruti has guided for double-digit volume growth in FY19, compared with 8-9 per cent for the industry.
The company sold 17.79 lakh vehicles in FY18, a gain of 13 per cent YoY.
Based on the volume guidance, it appears that Maruti expects further market share gains.
It has an order backlog of 1.1 lakh units of recently- launched vehicles such as New Swift, Dzire, Baleno and Brezza.
Furthermore, there are two more new vehicle launches in the next few months.Surging raw material costs negatively contributed about 100 basis points in the March quarter and the pressure is likely to mount.
However, the Street expects operating profit margin of 16.3 per cent and 16.8 per cent for FY19 and FY20, respectively, as compared with 15.1 per cent in FY18.
Factors such as softening discount level, higher utilisation of the Gujarat plant and lower royalty payment are likely to offset raw material pressure.