Maruti Suzuki India Ltd on Thursday posted a record net profit in the fiscal second quarter as it sold more vehicles and cut costs, but cautioned that margins will come under pressure when it starts buying cars from parent Suzuki Motor Corp. under a contract manufacturing tie-up.
Net profit at India’s largest car maker jumped 60.2% year-on-year to Rs2,398 crore in the three months ended September. The company comfortably beat the Rs1,770 crore it had been expected to post in profit, based on the average of 31 analysts’ estimates compiled by Bloomberg.
Net sales touched a record Rs20,296 crore, a 29.28% increase from the year-ago period.
“Higher volumes leading to higher capacity utilization, lower expenses on sales promotion and marketing and higher non-operating income contributed to increase in profits. This was partially offset by adverse foreign exchange movement,” the company said in a statement.
The Japanese yen has strengthened against the dollar in the past three months. A strong yen makes imports from Japan costlier.
“The profit went up by 60%, which is a very high increase, but when you get to the very high levels of capacity utilization, which we have now, which is well above 100%, then every extra car adds a lot to the profit because depreciation and other overheads have earlier been taken care of by the lower production so anything above the actual cost of production is all profits, so that has been a major driver for these numbers,” R.C. Bhargava, chairman of Maruti Suzuki, said at a press conference.
Maruti’s contract manufacturing agreement with its parent Suzuki Motor Corp. comes into effect in the March quarter of this fiscal year. Suzuki’s plant is expected to be operational by February, solving Maruti’s capacity woes.
Maruti will buy vehicles from Suzuki Motor Gujarat at cost price but even than that will impact Maruti negatively, managing director Kenichi Ayukawa said.
“In case of any new factory getting started, those cars’ development costs will be charged with depreciation, etc., and that way it becomes a negative impact for the product,” he said. “May be we will get some impact. Margins will be impacted. Costs will get higher. Additional costs will be added with the transfer of components. We will have to absorb some costs.”
To be sure, during any expansion, the usual fixed costs remain high until the company attains full capacity, but they start moderating as soon as capacity utilization improves.
“Still, I don’t believe that our selling price will be lower than the costs. It is not that our cars will sell at a loss. So, the total profit in absolute terms should not come down. But if like today we have 17% Ebitda (earnings before interest, tax, depreciation and amortisation) margin, then that may not be the case,” Bhargava.
Suzuki’s first assembly line in Gujarat will have capacity to produce 250,000 vehicles a year—given the current state of demand for Maruti’s cars, it may take at least a year to exhaust the new capacity.
Suzuki has already started work on building a second production line.
Maruti Suzuki sold a total of 418,470 vehicles during the September quarter, an increase of 18.4% over the same period a year ago. Sales in the domestic market rose 18.5% to 383,030 units. Maruti exported 35,440 units, up 17.9%.
“Strong margin performance despite unfavourable currency, as lower discounts and cost reductions helped. While we have a ‘Neutral’ on the stock due to valuation, we continue to highlight MSIL as the best play in Indian automotive sector,” said Nitesh Sharma, CFA, institutional equity research (auto and auto ancillary), Phillip Capital Pvt. Ltd.
Maruti has targeted selling 2 million vehicles a year by 2020 and is confident of double-digit growth in sales during the current fiscal year.
Maruti Suzuki shares on Thursday fell 0.21% to Rs5,859.75 on BSE, while the benchmark Sensex gained 0.29% to 27,915.90 points.