Going by the mainstream media reports, Maruti Suzuki seems to have achieved an extraordinary increase of profits in a subdued market. This is as per the quarterly results of March 2013. In spite of a reduction in sales Maruti Suzuki has been reported to have an 80% increase in net profits over the previous year. Business journalists have been going head over heels on this announcement. The success is attributed to better product mix, lower discounts, price hikes, localisation and favourable price of yen. Truly amazing indeed.
The major and only contributor to the high profits is the reduction in cost of materials. There is a direct 7% reduction in cost of material consumer. The cost of material consumed has fallen from being 21.4% of sales to 18.3% of sales. In the quarter ended March 2012, an average car would have Rs. 2.46 lakh worth of materials. In 2013, in spite of inflation and in spite of a higher proportion of larger cars being sold this cost has come down to Rs 2.39 lakhs per car. Larger vehicles would clearly demand more material and thus this cost should have increased. Surprisingly, the cost choose to come down.
Let us first try to understand the imported materials. An average of weekly prices from April 2012 to March 2013 is Rs. 1.52 for one yen. For the previous year in the same period this was Rs. 1.64. This is around a 7% depreciation of the Yen versus the Rupee. Maruti Suzuki imports around 25% of its raw material and of this around 80% is from Japan. Applying this formula to the cost of material consumed, the imports from Japan for quarter of March 2012 would be Rs. 177,482 lakhs. A 7% reduction to this, because of currency depreciation by 7% would create an import bill of Rs. 165,058 lakhs. If we apply the formula (80% of 25% of the total cost of material consumed) to the quarter of March 2013 we get a remarkably similar actual value of Rs. 164,514 lakh. This is less than half a percent off the predicted value. We can safely assume that the yen depreciation has caused a 7% reduction in the import bill. Also, we must note that as the Yen rises this saving is bound to vanish. (In fact the Yen has already appreciated by around 5% in April 2013)
Since the total material cost reduction was 7% over the two quarter, it means that there has been an equal 7% reduction in the domestic procurement of the year. When prices of metals (steel and aluminium) have remained more or less steady, this 7% reduction seems hard to believe. There is no definite word on how this 7% cost reduction has been achieved without a corresponding reduction in the prices of basic inputs. Maruti Suzuki attributes this to reduction of suppliers and other techniques which have been standard industry practices for decades. To attribute the dramatic reduction to such standard techniques seems highly improbable. And if it was actually due to these techniques, that Maruti Suzuki avoided doing this for so many years also points a finger at the ability of the management.
Obviously the financial reporters have not cared to question the company and have not done their homework. They merely choose to report directly from the company data and for reasons best known to them, create a feeling of exuberance, when no reason exists for the same. The future for Maruti Suzuki seems quite bad to me. The appreciating Yen would hit the imports hard. It would also not be possible to keep the local procurement costs low when the input costs are rising or at best steady.
The quarter ending June 2012 was a very poor one for Maruti Suzuki. Any decent performance for the quarter ending June 2013 would thus again show a significant increase in profits. However, given the skills of financial engineers within firms, it would not be correct to base company analysis on the data and information supplied by the company itself. Analysts must dig deep, get a thorough understanding of the firm's business, ask relevant questions. Only after this, should any kind of analysis be submitted. My prediction for Maruti Suzuki is that I do not see a significant change in the profits over a year. What do you feel?
The major and only contributor to the high profits is the reduction in cost of materials. There is a direct 7% reduction in cost of material consumer. The cost of material consumed has fallen from being 21.4% of sales to 18.3% of sales. In the quarter ended March 2012, an average car would have Rs. 2.46 lakh worth of materials. In 2013, in spite of inflation and in spite of a higher proportion of larger cars being sold this cost has come down to Rs 2.39 lakhs per car. Larger vehicles would clearly demand more material and thus this cost should have increased. Surprisingly, the cost choose to come down.
Let us first try to understand the imported materials. An average of weekly prices from April 2012 to March 2013 is Rs. 1.52 for one yen. For the previous year in the same period this was Rs. 1.64. This is around a 7% depreciation of the Yen versus the Rupee. Maruti Suzuki imports around 25% of its raw material and of this around 80% is from Japan. Applying this formula to the cost of material consumed, the imports from Japan for quarter of March 2012 would be Rs. 177,482 lakhs. A 7% reduction to this, because of currency depreciation by 7% would create an import bill of Rs. 165,058 lakhs. If we apply the formula (80% of 25% of the total cost of material consumed) to the quarter of March 2013 we get a remarkably similar actual value of Rs. 164,514 lakh. This is less than half a percent off the predicted value. We can safely assume that the yen depreciation has caused a 7% reduction in the import bill. Also, we must note that as the Yen rises this saving is bound to vanish. (In fact the Yen has already appreciated by around 5% in April 2013)
Since the total material cost reduction was 7% over the two quarter, it means that there has been an equal 7% reduction in the domestic procurement of the year. When prices of metals (steel and aluminium) have remained more or less steady, this 7% reduction seems hard to believe. There is no definite word on how this 7% cost reduction has been achieved without a corresponding reduction in the prices of basic inputs. Maruti Suzuki attributes this to reduction of suppliers and other techniques which have been standard industry practices for decades. To attribute the dramatic reduction to such standard techniques seems highly improbable. And if it was actually due to these techniques, that Maruti Suzuki avoided doing this for so many years also points a finger at the ability of the management.
Obviously the financial reporters have not cared to question the company and have not done their homework. They merely choose to report directly from the company data and for reasons best known to them, create a feeling of exuberance, when no reason exists for the same. The future for Maruti Suzuki seems quite bad to me. The appreciating Yen would hit the imports hard. It would also not be possible to keep the local procurement costs low when the input costs are rising or at best steady.
The quarter ending June 2012 was a very poor one for Maruti Suzuki. Any decent performance for the quarter ending June 2013 would thus again show a significant increase in profits. However, given the skills of financial engineers within firms, it would not be correct to base company analysis on the data and information supplied by the company itself. Analysts must dig deep, get a thorough understanding of the firm's business, ask relevant questions. Only after this, should any kind of analysis be submitted. My prediction for Maruti Suzuki is that I do not see a significant change in the profits over a year. What do you feel?
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