Maruti Suzuki’s (MSIL) Q4FY11 performance was ahead of our estimate boosted by a gratuity provision write back and a lower tax rate. Reported margins stood at 10% as against our estimate of 9.5%. However, adjusting for write back in employee costs and change in accounting for tooling, adjusted margins were lower at 9.4%. R&D benefits lowered the tax rate by 850bps QoQ to 20.2%. As a result reported profit was flat YoY at Rs6.6bn exceeding our estimate of Rs5.7bn.

Marketshare contraction limited in FY11: MSIL was able to limit marketshare contraction to 140bps during FY11, despite increase in competitive intensity. Alto K10 and Eeco models helped in 27.3% growth in domestic volumes to 312k units during Q4FY11. Exports remained a damp squib, declining 26.4% to 31k units. Total volumes were higher by 19.5% at 343k units.

Improvement in product mix: There was a sequential improvement in product mix with higher contribution from C- segment (Dzire, SX4). Additionally, a price increase of 1% taken during the quarter helped to increase the average realisations by 2.4% QoQ to Rs287k/unit.

Inflated margins: Reported margins at 10% were inflated on two counts. Firstly, a Rs200mn write back was taken on gratuity provision thus lowering employee costs. Secondly, change in tooling policy deflated the raw material costs by Rs500mn. However, the benefit of lower raw material costs was negated by a similar increase in depreciation expenses.

Lower tax rate: Tax incentives on the increased R&D spend helped lower tax rate to 20.2%. Thus net profits remained flat at Rs6.6bn as against our estimate of Rs5.7bn.

Outlook: Increased capacity at Manesar plant and product refreshment will help MSIL to achieve a volume of 1.44mn units in FY12. We believe, MSIL margins have bottomed out and have marginally upped our FY12 margin estimates at 10% leading to 3% increase in FY12 earnings estimate to Rs94. We introduce FY13E earnings of Rs110.6.