Operationally Inline; Other Income Boosts Profits Maruti Suzuki (MSIL) Q1FY12 operational results met our expectations, however net profits surpassed it with higher other income and lower depreciation charges. Operating profits at Rs8.1bn met our estimates of Rs8bn. The positive surprise in results was due to other income which was 50% higher than estimate and an 18% QoQ decline in depreciation charge. Net profits at Rs5.5bn were ahead of our estimate of Rs4.4bn.

Volumes decline after a gap of nine quarters: After an exhilarating 20% plus growth in FY10-11, domestic car industry hit the brakes in Q1. Industry grew at 7.2% as successive fuel price and interest rate hikes dampened sentiments. MSIL was further affected due to a 10 day strike at its Manesar plant. MSIL marketshare contracted 270bps QoQ due to its dominant position in most affected segment of entry level cars. Exports continued to slide, down 23.7% YoY to 31k units. MSIL volumes declined 0.6% YoY to 282k units.

Diesel variants get a boost: The widening price differential between petrol and diesel led to incremental demand for diesel variants thus improving realisations. This alongwith a sequential decline in discounts offered led to a 2.9% QoQ boost to realisations. Revenues at Rs85.3bn were 1.7% higher than estimate.

Margins inline: Selling and distribution expenses during the quarter were lower due to reduced ad spend. Other expenses and royalty too declined on a sequential basis. However, raw material costs rose due to hike in steel and tyre prices. Margins contracted 8bps YoY to 9.5% and were inline with estimates.

Profits 25% higher than estimate: Other income during the quarter increased 80% YoY to Rs1.8bn. Other income was inflated due a Rs410mn gain on long term investments. Depreciation charges moderated QoQ, sans the one time hit taken in Q4FY11.

Outlook: The interest rate hikes and weak macroeconomic environment would continue to take a toll on volumes in FY12 with some easing expected in FY13. We maintain our volume growth estimate at 7.9% and 14.5% in FY12 and FY13 respectively. With no significant deviation on the operational front we maintain FY12 and FY13 earnings estimate at Rs86.9 and Rs106.2 respectively.

VALUATIONS AND RECOMMENDATION Due to near term concerns, the stock is currently trading at an attractive valuation of 11.1x FY13E earnings. Although performance is expected to remain subdued in near term, we remain positive on the company owing to its strong product portfolio and distribution reach. We maintain a ‘BUY’ recommendation on the stock with a target price of Rs1,594 discounting FY13E earnings 15x.