By Ravi Krishnan
New Delhi: Maruti Udyog Ltd (MUL), India’s largest car maker, said net profit for the fourth quarter (Q4) ended March 2007 rose a better-than-expected 24% from a year ago, as higher sales of its small car models helped to offset the increase in raw material costs and a one-time loss incurred by a new unit.
Analysts expect growth next year to slow down to less than 15% as lending rates rise and competition increases in its core segment of small cars.
The company’s Q4 net profit increased to Rs448.5 crore from Rs361 crore a year ago. The increase was better than the Rs431 crore average estimated by five analysts polled before the results.
Maruti Suzuki Automobiles India Ltd, which was amalgamated with MUL a year ago, makes cars in the new factory at Manesar, Haryana, and made losses of Rs58 crore in the quarter as it wasn’t operating at full capacity.
“We started manufacturing there only post-September,” said MUL’s chief general manager (finance) Ajay Sheth. “During the time, fixed overheads kept building up.” Fixed overheads include costs such as utilities and maintenance even while the unit is idle. It included staff wages and training. MUL’s interest expenses also rose more than three fold during the quarter as it had to pay for a $124 million (Rs521 crore) loan for the unit.
Sales at MUL rose 35.2% to Rs4,428 crore in Q4, as it sold more of its largest-selling small car brand, Alto, and customers bought more of the newly-launched Zen Estilo and Swift diesel models. In the same period of the previous year, the revenue was Rs3,277 crore. The full-year net profit of the firm rose 31.3% to Rs1,562 crore from Rs1,189 crore a year ago. Sales were up 21.6% to Rs14,654 crore.
A 9% economic growth, which is creating more jobs and increasing disposable incomes, better roads and as many as 30 new model launches a year is driving demand in Asia’s fourth-largest automobile market. Sales of passenger vehicles increased 21% to 1.4 million units in 2006-07. Still, a 6% inflation and rising lending rates are expected to dampen demand growth to less than 15% this year.
“Maruti may not witness the same spurt in demand as last year,” said Huzaifa A. Suratwala, a research analyst at Emkay Share and Stock Brokers Ltd. “People have numerous options and rising interest rates are also a concern.”
Lending rates have risen by up to 6% in the past four months forcing car buyers to postpone purchases.
MUL’s managing director Jagdish Khattar is tying up with banks and finance companies to mitigate the impact of rising loan rates and boost sales. “Our marketing expenses will rise,” said Khattar. “We are talking to banks for offering specific schemes for specific models in specific areas.”
But rising expenses are likely to put further pressure on margins. MUL’s operating margins fell about 240 basis points to 12.4% in Q4 from a year ago, as increasing prices of raw materials, such as steel and rubber, which account for three-quarters of total expenses, also rose, according to estimates provided by Bhushan Steel & Strips Ltd.
Operating margins measure how much profit is left after deducting the basic expenses of running a business.
“Commodity prices impacted us,” said Khattar. “They went up by 2.15% over last year and we are negotiating fresh contracts,” he added.
Shares of MUL closed 3.5% up at Rs794.4 on the Bombay Stock Exchange on TuesdayRs..