Maruti Suzuki Ltd is expected to open higher and could well rally 4-5 percent once trading resumes on Monday after India’s largest car maker reported 3 percent year-on-year (YoY) growth in profit at Rs 1,799 crore for December quarter.
Even though the net profit was in line with estimates, analysts are positive on future earnings visibility for automaker largely supported by strong order book, new product launches, and improvement in margins due to loyalty reduction.
Maruti Suzuki today said the board has approved a revision in the method of calculating royalty which would result in lower royalty payments for new model agreements starting the Ignis.
“We have factored 50bps improvement in FY2019 and 60 bps improvement in FY2020 earnings. We have raised our FY2020 estimates by 5 percent,” Bharat Gianani, Research Analyst – Auto/Auto Ancillaries, Sharekhan told Moneycontrol.
“Re-rating is possible given the increased earnings and strong management commentary on the product launch pipeline. We think the stock should open up by 4-5% in Monday’s trade,” he said.
Sharekhan maintains a buy rating on Maruti Suzuki and raised its 12-month target price to Rs 11,085 from Rs 10,170 earlier post Q3 results.
Revenue from operations for the quarter grew by 14.2 percent to Rs 19,283 crore compared to Rs 16,888 crore in year-ago, driven by double-digit sales volumes.
The company sold a total of 4,31,112 vehicles during the quarter, a growth of 11.3 percent over the same period last year, with domestic sales growing 12.4 percent to 4,00,586 units.
The changes in royalty payment would be implemented after approval by the board of parent company Suzuki Motor Corporation. As per the management, all new models viz Ignis, the newly launched Dzire, the upcoming Swift and all the future launches would benefit from lower royalty outgo.
Revised royalty would be implemented retrospectively after approval from the parent company. Based on the current sales mix, these 3 models contribute to about 30 percent of the company’s volumes and are likely to witness the benefit of lower royalty, say, experts.
“We think the impact would definitely result in better bottom line as Maruti is already insulated against foreign exchange fluctuations since it pays Royalty in Rupee to the parent company for new models since 2016,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.
“Maruti is also expected to pay the royalty on all models to Suzuki in rupee terms by 2024-25. As far as re-rating is concerned, we are still plugging in the details for different models. We expect the opening to be flat to positive on Monday, but it is a good buy on dips stock,” he said.
Operationally, the company reported an in-line set of numbers. Lower other income and higher tax outgo lead to muted net profit which was below estimates.
Operating profit or EBITDA (earnings before interest, tax, depreciation, and amortisation) increased 22.1 percent to Rs 3,038 crore and margin expanded by 100 basis points to 16 percent compared to year-ago.
“Although operating profit increased by 26.7 percent, net profit growth was restricted to just 3 percent on account of increase in effective tax rates and lower other income. Other income was lower due to mark-to-market (MTM) loss of Rs3.13bn, due to increase in interest rates,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol.
“Royalty rate to be reduced on retrospective effect from Jan’2017 due to revision in the method of royalty on new products such as Ignis, Dzire, Swift etc. Quantum of royalty reduction would be announced post-Suzuki Board meeting,” he said.
Matlawala further added that current royalty rate is 6 percent and any significant reduction in royalty rates will certainly make a strong case for a re-rating of a stock.moneycontrol