Depreciation, royalties, higher costs cut into Maruti margins

Depreciation, royalties, higher costs cut into Maruti margins
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First Published: Tue, Jul 22 2008. 12 02 AM IST
Updated: Tue, Jul 22 2008. 12 02 AM IST
New Delhi: Maruti Suzuki India Ltd, which makes about half the cars sold in India, said net profit for the first quarter ended June fell 6.7% from a year ago, as higher depreciation, power costs and royalty payments offset the gains from increasing sales of cars, such as the Swift and WagonR.
Analysts have cut growth forecasts for the passenger car industry as lending rates climb and the country’s central bank tightens credit norms. Three of four cars sold in India are bought on credit.
Maruti’s first quarter net profit fell to Rs465.8 crore from Rs499.6 crore in the year-ago period. The decrease was in line with the Rs466.5 crore average estimated by five analysts polled by Mint before the results.
Sales rose 18.13% to Rs5,436.5 crore during the period as the firm sold more cars both in India and overseas. In the June quarter of 2007, the revenue was Rs4,602.18 crore. This increase in revenues was more than the 13.5% expansion in volume sales, which grew to 192,584 units that included higher demand for expensive cars such as the Swift Dzire and SX4 sedans.
Still, “inflation, interest rates and fuel prices would continue to put pressure on passenger car demand,” said K.K. Mital, head, portfolio management services at Globe Capital Markets Ltd.
The increase in costs saw Maruti’s operating margins fall about 487 basis points to 9.75% in the latest quarter from a year ago, as it had to shell out more money as royalty payments to mother company Suzuki Motor Co. for new cars such as the Dzire and its own power costs rose. A basis point is 100th of a percentage point.
Maruti’s royalty payments increased by Rs35 crore while its power costs went up by Rs30 crore as the increase in prices of gas and diesel that fire its power plants pinched the company. Depreciation more than doubled to Rs166 crore as the firm introduced new norms in the last quarter of the last financial year.
“We are ramping up capacity at the Manesar plant,” said Ajay Sheth, chief general manager, finance. “The Manesar plant is run on diesel,” which is more expensive than gas.
Costs of raw materials such as steel rose about 50% from a year ago. Steel accounts for about two-thirds of a vehicle’s weight. Operating margins measure how much profit is left after deducting basic expenses of running a business. The company’s other income or earnings from treasury rose 47.2% to Rs328.78 crore.
Yet, some analysts expect margins to improve. “Margins are going to be better than what has been achieved as we are looking at higher proportion of sales coming from exports in the later half of the year,” said Mahantesh Sabarad of Centrum Capital Ltd.
Shares of Maruti closed 3.92% up at Rs648.2 on the Bombay Stock Exchange on Monday. The results were declared after the market closed.
Shally Seth in Mumbai contributed to this story.
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First Published: Tue, Jul 22 2008. 12 02 AM IST