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Maruti Udyog Ltd (MUL) reported net sales growth of 27% YoY for the quarter ended December 2007 to Rs 46,741.3 mn on the back of strong overall sales volume growth of 17.1% YoY to 2,01,629 vehicles and net realization growth of 8.5% YoY to Rs
2,31,818 per vehicle.

It reported 18.5% YoY growth in overall sales volumes during the nine month ended December 2007 outperforming overall industry growth of 13.4%. MUL registered 17.3% YoY growth in A2 segments on the back of good demand for Swift (petrol + diesel) apart from other models like Alto and Zen Estilio. ‘SX4’, the company’s latest offering in the C segment and the one which enabled it to plug a big gap in its product portfolio, continued to rake in good numbers. The company registered impressive 69.7% YoY growth in A3 segment with the success of SX4 sedan. Also, The C segment which comprises of Omni and Versa reported a growth of 9.6% YoY during quarter.

Omni and Versa are finding good demand in Tier II and Tier III cities. But we expect them to find tough competition from Tata’s recently launched Winger and Magic. Launch of a brand new ‘Vitara’ also seems to have helped its MUV sales, where growth stood at 68.6% YoY during the third quarter. On the back of its foray into newer markets, the exports grew by 51.6% YoY during the third quarter. The company has got good response for its ‘Zen Estilio’ from countries like Indonesia and Srilanka.

MUL’s EBITDA for Q3FY08 grew by 20.9% YoY to Rs 6,132.5 mn in absolute terms. EBITDA margins declined by 70 basis points during the quarter at 13.1%. Despite rising prices of key raw materials, the company has done well to keep total costs under check. The raw material cost as a percentage of sales increased to 76.5% as compared to 75.2% in corresponding quarter last year mainly due to higher commodity prices and product mix variance. However, the company was successful in keeping a check on Staff costs and Other expenses.

MUL’s net profit for Q3FY08 grew by 24% YoY to Rs 4,670.4 mn and it reported EPS of Rs 16.2 for the quarter. This was mainly due to whooping growth of 32.9% in Other income to Rs 1706.7 mn. The reason behind such growth in Other Income was scrap sales of Rs 396 mn, cash discounts from vendors amounting Rs 244 mn while the rest was from the non-operational side. Interest expenses declined by 8.8% YoY to Rs 143.6 mn. Depreciation charges for the quarter witnessed increase of 14.3% YoY to Rs 867.3 mn. Also, effective tax rate for the quarter stood at 31.6% compared to 30.8% in corresponding quarter last year. The net profit growth for Q3FY08 was mainly driven by higher sales volume, favorable product mix, better realizations and higher other income apart from successful curtailment of costs.

Several players have announced plans to enter the small car segment, including Honda, Renault, Bajaj and Toyota. The entry of strong players like these, who have a strong brand equity and financial muscle might hurt existing players. The comfortable three player structure of the small car market might get shaken up with a re-alignment of market share. Though many global giants are planning to have a share in the pie of the growing small car segment in India, we believe MUL will be able to retain if not increase its overall market share because of its highly loyal customer base, low maintenance costs, aggressive model launches and wide-spread national sales and service network. We also believe that recently launched TATA’s small car ‘NANO’ will create a new segment in passenger cars straddling the gap between two wheelers and Maruti 800. With introduction of Nano, Maruti 800 standard version sales may drop further. At present, A1 segment constitutes ~9% of total volume of the company.

MUL is the largest passenger car manufacturer in India and it has a sales network of 307 state-of-the-art showrooms across 189 cities with over 6000 trained personnel. The company enjoys a market share of 58.5% in small and compact car segment and overall 52.6% market share in passenger cars during the period.

At present stock looks attractive at 10.5x FY09E & 8.6x FY10E earnings, 6.3x EV/ EBDITA FY09E & 5.1x EV/EBDITA FY10E and 1.1x FY09E MCAP/Sales & 0.8x FY10E MCAP/Sales.

Report card

PE ratio     14.22             20/02/08
EPS (Rs)     54.06             Mar, 07
Sales (Rs crore)   4,674.13   Dec, 07
Face Value (Rs)    5   
Net profit margin (%) 10.29    Mar, 07
Last dividend (%)     90        24/04/07
Return on average equity 22.78   Mar, 07