Maruti Suzuki India Ltd. Earnings Call Insights: Volume Outlook and SPIL Merger

Maruti Suzuki India Ltd. (532500) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Volume Outlook

Kapil Singh – Nomura: I had a couple of questions. Firstly on the volume outlook, we’ve in the past discussed around 0% to 5% growth for the industry and for Maruti as well. Does that remain intact? What are your thoughts on that, and how the inventory levels stays for the Company?

Nikhil Vyas: We are still trying to get more visibility on the market and the macroeconomic environment. As of now, our outlook stays the same, 0% to 5% growth. Inventory levels are manageable, but we also have to keep in mind that there is a festive season ahead of us. So some inventory buildup is required.

Kapil Singh – Nomura: Secondly, on the cost side, what was the JPY to INR realization or JPY realization for the Company?

Ajay Seth – Chief Financial Officer: Average yen realization was – yen-rupee realization was at 0.60 for the quarter. So that’s where it goes.

Kapil Singh – Nomura: Sir, it’s likely to remain the same because it’s around those level or you have hedges which can impact this?

Ajay Seth – Chief Financial Officer: It will depend largely on where the rupee moves, but actually there is (indiscernible) move further to the market rates, so if rupee stays where it is then it will be either at the same level or better, but if rupee (from here) depreciates then there could be a change.

Kapil Singh – Nomura: So what are the hedges that we have now? How much percentage is hedged in (indiscernible)?

Ajay Seth – Chief Financial Officer: We are about 52% hedged, both direct and indirect put together or the balance exposure for the year. What is not hedged is basically the (indiscernible) side of exposure, which is almost about 31%. On the direct side, we are almost 80% hedged…

Kapil Singh – Nomura: This is USD, JPY?

Ajay Seth – Chief Financial Officer: That’s right.

Kapil Singh – Nomura: Sir, could you also share what was the royalty expense as a percentage of sales?

Ajay Seth – Chief Financial Officer: This quarter we were at 6.1%.

Kapil Singh – Nomura: Just one more thing. What was the average discount for the quarter?

Ajay Seth – Chief Financial Officer: (INR13,426) was this quarter’s average discount.


SPIL Merger

Mahantesh Sabarad – Fortune Equity: Sir, you haven’t restated your last year’s quarter one results with the SPIL numbers there. I understand it was not with the – the merger happened later, but then assuming the merger would have happened, what would have the last year’s quarter one numbers be in terms of EBITDA margins and PAT?

Ajay Seth – Chief Financial Officer: I can only give you what is the impact of – in the current quarter on account of the SPIL merger, so you can derive it from there. Broadly, the material cost has come down by 3.5% because of the merger. The expenses of the various heads have gone up by 3.1%. These expenses will be clubbed under the heads of manufacturing and administration expenses, royalty, employee cost and depreciation. So, they are being – so therefore the conversion cost has gone to respective heads and the material cost has come down by 3.5%. Profits mostly have gone up by 0.3% on account of the margin…

Mahantesh Sabarad – Fortune Equity: 0.3% of the top line, that’s what you mean?

Ajay Seth – Chief Financial Officer: That’s right. Not on the top, on the bottom line.

Mahantesh Sabarad – Fortune Equity: So against INR424 crores that you had last year, it was the profits of SPIL were just 0.3% of that is what you’re suggesting?

Ajay Seth – Chief Financial Officer: Of the top line, yes, of the top line. Profits in the top line is 0.3%; so 0.3% of top line would be what is getting added all.

Mahantesh Sabarad – Fortune Equity: So instead of a 3.9% net profit margin, you would have been 4.2% net profit margin. Okay, that was one. Two, again on your engines, are you procuring engines from the Fiat venture here in India and how much is that contributing? How much is the purchase for the quarter?

Nikhil Vyas: Yes, we are procuring; there is always a mix. So we don’t give out the exact numbers.

Mahantesh Sabarad – Fortune Equity: But then what roughly to get – just to get an idea of all the volumes that you do, diesel volumes that you do, typically it would be in what range, at least a broad range would help us Sir?

Nikhil Vyas: About 34% of our total volumes in domestic market are diesel currently and this we are procuring from our in-house diesel plant (and Fiat).

Mahantesh Sabarad – Fortune Equity: So is there a substantial difference in terms of landed cost for you between the locally made or in-house made engine versus that (Tokyo Frontier)?

Ajay Seth – Chief Financial Officer: Not significant.

Mahantesh Sabarad – Fortune Equity: Fine, Sir. What would be your – I know you wouldn’t resist giving your margin outlook, but since you have written back to a double-digit margin this quarter, how would you like to see the margins ahead if not for this year, at least for the next two, three years kind of target?

Ajay Seth – Chief Financial Officer: I think there are a variety of factors that we have to see. One is, of course, how the volumes pick up. The economies of scale will only come when you have sizes on volumes; although our third plant in Manesar is going to be ready in September, so there will be incremental fixed cost that will incur on that account. So volumes will be very critical. Exchange rate, especially dollar/rupee will be very critical to watch; and exchange rate can have a significant way of (indiscernible) that you are seeing now. Third, of course, would be the mix that we’ve said on a given point in time. Our efforts on cost reduction as we’ve demonstrated in this quarter will continue. We will try to increase our efforts on localization, on value engineering and value in (other series), et cetera. So whilst we will continue to work on that, but I think there are so many variables today, for us to give a guidance on margins would be very, very difficult.