The following is the Stock Analyst Note on Maruti Suzuki Ltd published by Morningstar Analyst Manish Vaswani. Registered Morningstar users can view the full report (PDF) here, which includes our complete overview, thesis, valuation, risks and our bull and bear cases.
Maruti Suzuki delivered a strong third quarter for fiscal 2013 thanks to a combination of better product mix, increased domestic sales, higher exports, and an easy comparable with the same quarter last year. The results were in line with our expectations, and we are maintaining our fair value estimate.
Third-quarter revenue grew an impressive 45.6% year over year, owing to a 26% increase in unit volume to about 301,450 vehicles and a greater than 15% improvement in average revenue per vehicle (ARPV).
Although the growth in ARPV is impressive, resulting from an improved product mix as higher-priced diesel vehicles contributed a greater proportion of overall volume, the company has also benefited from an easy comparison with the prior year's results. Maruti experienced a labor strike in the third quarter of fiscal 2012 which had crippled production for more than a month at one of its plants, leading to a sharp reduction in volume.
In the fiscal 2012 fourth quarter, volume recovered to 360,000 vehicles from 240,000 vehicles in the third quarter. Therefore, Maruti's fiscal fourth-quarter 2013 results will be more indicative of the company's performance relative to competitors.
We calculate that gross margin improved by more than 100 basis points from the third quarter of fiscal 2012 to 19.8%. What we are particularly impressed with is a 340-basis-point improvement in Maruti’s third-quarter operating margin, to about 4.75% owing to lower material costs and a reduction in employee benefit expense.
The company’s third-quarter net income increased by a whopping 144%, leading to earnings per share of INR 17.35 compared with INR 7.12 a year ago.
In the second quarter of fiscal 2013, Maruti’s Manesar plant suffered a labor stoppage leading to a 9% reduction in unit sales and about a 30% decline in operating income on a year-over-year basis. However, owing to a strong recovery in the subsequent quarter, fiscal 2013 first nine months' unit volume and operating income have improved compared with fiscal 2012.
Even though operating margin for the first nine months of fiscal 2013 was flat with the same period last year at 3.7%, the trajectory is positive given the improvement from the first six months of fiscal 2013 when operating margin was 3.2%.
With the upward momentum in operating margin from the fiscal 2013 third quarter, an improving product mix, and favorable foreign currency exposure, we believe Maruti will turn in an improved fourth-quarter performance compared to the previous year, and hence we leave our INR 1,265 fair value estimate unchanged.
