India’s largest passenger vehicles manufacturer, Maruti Suzuki India Ltd has reported weak results for the March quarter. Its net profit for the period was just Rs243 crore, against consensus estimates of about Rs360 crore. One could argue that analysts wouldn’t have factored in a loss of Rs121 crore on account of forex hedges in their estimates. But the losses on forex hedges taken to protect export revenues shouldn’t be treated as an exceptional item. It was a business decision to lock in dollar revenues at Rs42 per dollar. Investors have to simply live with the fact that Maruti’s export division won’t benefit fully from the huge depreciation in the rupee.
One-third of the company’s forex exposure is still hedged and, to that extent, gains from the rupee depreciation will be limited. In any case, the results were weak even after adjusting for this loss. Operating profit fell by about 11% despite a 31% jump in operating revenues. This is after adjusting for an exceptional income of Rs47 crore in the year-ago period, included under “other operating income”. Volumes rose by 17% and average realizations increased by nearly 13% (because of a change in product mix), resulting in healthy revenue growth. But the company incurred a high cost in the form of discounts in order to induce sales. This, coupled with higher material costs, explains the drop in profit margins.
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While commodity prices have dropped, the full impact of this will be visible only from the June quarter. Raw material costs instead rose during the March quarter, as the depreciation in the rupee led to an increase in the cost of imports.
As far as the cost of raw materials goes, things are likely to be much better this financial year, primarily because of lower commodity prices. Besides, the company plans to increase the level of indigenization and this also would result in savings.
The company is also set to become a net exporter from this year, and this would act as a natural hedge. Consumer sentiment has also improved in recent months. But despite all this, analysts are estimating tepid growth this year because of the slowdown in the economy and the resultant job losses and salary cuts.
It’s interesting, then, that Maruti still enjoys a trailing price-earnings multiple of 19. What’s even more surprising is that the company’s shares rose marginally after the weaker-than-expected results were announced. The markets seem to be too optimistic to ignore the sharp drop in the company’s profit.
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