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S. Muralidhar

New products to refresh line-up.

SHAREHOLDERS of Maruti Udyog (MUL) can continue to hold the stock at the current price of Rs 365. This recommendation is based on the sustained market leadership position that the company enjoys, the potential for an increase in sales for MUL after it enters new segments next year, and the long-term prospects for the two new subsidiaries that the company has set up in collaboration with its parent, Suzuki Motor Corporation.

Maruti's performance during the first half of this fiscal paints a healthy picture of the potential earnings that the company can post for the full year 2004-05. Net sales for the six months ended September 2004 at Rs 5,214 crore was up over 24 per cent compared to the corresponding previous period's Rs 4,190 crore.

Volume sales for MUL is on the road to cross to the five lakh units mark this fiscal. Number of vehicles sold at 2.53 lakh units in the first half of this year was up over 19 per cent compared to the half-year ended September 2003.

On the strength of this increase in volumes and revenues, MUL's net profit has, however, shot up by over 45 per cent to Rs 355 crore for the half-year ended September 2004 compared to the corresponding previous period. The much higher accretion to the bottomline, despite a relatively lower growth in revenues, has been achieved due to more than one factor.

Consumption of raw materials and components, as a percentage of total income, during the first six months of this fiscal, rose marginally to 77 per cent, compared to 73.3 per cent during the same period last year. In this case, for MUL, this is not an indicator of raw material consumption inefficiency, but rather an indicator of the higher value of the company's product mix during the first half of the current year.

The higher contribution to MUL's revenues by Alto, its best selling B-segment car, during the first half of this year compared to last year and the increase in sales that has been recorded for the restyled Esteem and Zen, would have also contributed to the increase in the cost of raw material consumed.

But, despite re-pricing lower the Esteem, the Alto and the Zen, MUL has managed to more than set off the lower realisation by containing costs and a higher-than-commensurate increase in volumes.

The company's successful employee rationalisation and aggressive automation programmes are also in evidence from the lower remuneration and employee benefits costs that have dropped by nearly 30 per cent to Rs 86 crore. This should also be viewed along with the sustained increase in volume production, an indicator of employee productivity gains.

On the cost front, MUL is likely to be on stream to achieve a further reduction in operating costs and, to a lesser extent, on the cost of components and other raw materials. The price of steel and oil may continue to be sustained at current levels and, as a result, input costs of raw material and logistics will continue to be under strain.

However, on the other hand, the demand for the company's vehicles is also likely to stabilise after the inflationary pressure on the price of petrol eases.

MUL has managed to corner a little over a percentage of the market share during the just ended half year compared to the corresponding previous period. This was largely on the back of Alto's and Esteem's performance. In the second half of thisyear, with the festive season on, Maruti can be expected to post even more impressive growth in volumes.

The growth in sales this fiscal has to come from MUL's current portfolio of vehicles. However, with the Suzuki Swift in the B+ segment and a new family van that will replace the Suzuki Versa, the MUL line-up will get new look next year. But though development costs for these two vehicles will not be high as they are being brought in from the parent Suzuki's stables, royalty payments will go up.

The hold recommendation for the stock also factors in the benefits that will accrue to MUL once the two joint venture subsidiaries — one for the manufacture of diesel engines and the other for the setting of a car assembly line and manufacturing unit — go on stream.

Both the subsidiaries involve Japanese parent Suzuki and MUL and could eventually mean that Maruti would have a combined production capacity of about a million vehicles and four lakh engines.

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