The three main factors behind the rise in profit - absorption of Suzuki Powertrain India Ltd (SPIL), large other income of around Rs 400 crore and unusually low tax rate of 16 per cent - may not sustain, Mahantesh Sabarad, senior vice-president at Fortune Equity Brokers, told NDTV Profit. (Watch)
A depreciating yen added to Maruti's bottom line as it helped reduce the cost of imports from Japan. Imports account for nearly 20 per cent of the company's costs. However, Maruti has hedged the currency for the next year, limiting any possible gains, Mr. Sabarad added. The yen has depreciated over 17 per cent against the rupee and by nearly 19 per cent against the dollar in the last six months.
By and large, multi-purpose vehicle (MPV) Ertiga has driven sales for Maruti, helping it weather the first fall in annual car sales for a decade. However, sales of the MPV have stagnated in the past six months. Maruti accounts for 40 per cent of India's passenger vehicle sales.
The small car segment hasn't done well either. Sales in this segment fell 13 per cent last fiscal. The Alto, launched in a new avatar late last year, hasn't helped much either. MPVs and SUVs -- where the company has limited presence - were the only segments that saw sales roar last year. The government's subsidies on diesel, the primary fuel for vehicles in this segment, have been a major driver of sales.
Japanese car maker Honda's latest launch Amaze has given Maruti enough reasons to be nervous. The Amaze, Honda's first diesel offering in India, is pitted directly against the DZire, Maruti's top-selling and most profitable model. "We believe Honda's launch could adversely impact Maruti's entry level sedan sales by as much as 10 per cent and overall volumes to the extent of 1-2 per cent for FY14," global investment bank BNP Paribas had said earlier.
The glut in auto sales has forced Maruti to slash prices, a move that will directly impact the bottom line. The company is offering 2-3 per cent discounts on the Swift, its most popular hatch, and the DZire, its top-selling sedan. With these two vehicles contributing over 50 per cent to the company's profitability, any discounts are likely to eat into the margins. Moreover, the discounts may not be very effective in boosting sales, according to Jagdish Khattar, a former managing director.
The SPIL merger is not earnings per share (EPS) accretive. "We have had a 4.4 per cent equity dilution, while the SPIL profit seems to have added only 3-3.5 per cent to PAT (profit after tax). So the whole thing about SPIL merger leading to overall improvement in Maruti doesn't seem to be the case. So I am really doubtful whether you should be looking at sustainability ahead," Mr. Sabarad said.
Poor EPS growth: Maruti ended this year with an EPS of Rs 80. Fortune Equity Brokers expects an EPS of Rs 92 next year and Rs 100 the year after. This means an incremental gain of Rs 20 in two years. In contrast, the brokerage expects two-wheeler maker Hero MotoCorp -- whose share price is nearly the same as that of Maruti and which ended the year with an EPS of Rs 106 -- to add Rs 38-39 in the same period.
Low dividend payout: Maruti pays a dividend of Rs 8 per share, while Hero pays Rs 60. "Clearly there is no case for Maruti. Hero is a better bet... It's better to shift to Hero," Mr Sabarad. Fortune Equity has a hold rating on Maruti, and a buy call on Hero.
Profit-booking might soon set in as Maruti stocks have jumped over 22 per cent in the last one year, largely out-performing the BSE Auto index, which gained 3.5 per cent for the same period. In contrast, the Sensex rose 13 per cent. Moreover, the current prices have bypassed Bank of America-Merrill Lynch's target of Rs 1603 for the stock.
With inputs from Reuters