India’s largest car maker Maruti Suzuki India Ltd posted an unexpected 24% decline in quarterly net profit for the first time since it went public in 2003 on account of higher depreciation and a fall in the value of hedging instruments it used.
The company’s net profit for the fourth quarter that ended on 31 March fell to Rs297.6 crore from Rs448.5 crore a year ago. The decrease was worse than the Rs446 crore average estimated by five analysts Mint polled before the results.
However, its net profit for the 2007-08 financial year rose 10.8% to Rs1,730.8 crore from Rs 1,562 crore a year ago. Sales were up 22.3% to Rs17,936 crore.
Maruti Suzuki managing director Shinzo Nakanishi (Photo by: Raveendran / AFP)
Analysts expect higher costs of raw materials and the general economic environment to squeeze its profits in the current fiscal year.
The company’s profits were squeezed by an additional Rs212 crore in depreciation it set aside in the fourth quarter because the firm reduced the number of years for replacing its assets from 13 to 8-11 years.
“The lifecycle of products is shortening and there is a fair amount of technology change, too,” said Ajay Sheth, chief general manager of finance. “We believe the lifecycle of models will shorten further as we go along.”
Maruti also took a Rs50 crore hit on account of a loss it incurred on forward contracts taken for its overseas sales and an external loan.
Its sales for the quarter, however, rose 7.9% to Rs4,763 crore, as it sold more of its Alto, Swift, and SX4 models. Its revenue was Rs4,413 crore, in the same period of the previous year, .
“Intensifying domestic competition will be the major challenge for the company, apart from higher raw material costs and other expenses,” said Vaishali Jajoo, an analyst with financial services firm Angel Broking Ltd.
Maruti’s rivals such as Toyota Kirloskar Motor Pvt. Ltd and Ford India Pvt Ltd are introducing new small cars—its bread-and-butter segment—as the country’s passenger vehicle sales are expected to grow to three million units by 2015, according to Society of Indian Automobile Manufacturers, an industry group.
Still, car makers are having a tough time in boosting sales and maintaining profits as interest rates surge to a six-year high and banks stay away from retail lending due to higher defaults.
Rising expenses are likely to put further pressure on margins as increasing prices of raw materials, such as steel and rubber, which account for three-quarters of total expenses, also rose in the last quarter. Prices of cold-rolled steel, used extensively in autos, rose by more than 30% since January, according to auto industry estimates.
“Commodity prices and cost of raw material is up,” said Shinzo Nakanishi, Maruti’s managing director. “That impacts us and we are negotiating fresh contracts.”
Shares of the company closed 2% down at Rs745.95 on the Bombay Stock Exchange on Thursday.