Despite a 26.8% year-on-year (y-o-y) growth in net sales to Rs 8,937.1 crore for the September quarter, Maruti Suzuki India Ltd (MSIL) posted a mere 5% increase in net profit to Rs 598.2 crore. The reasons were mainly twofold—higher raw material costs and currency risk.
Maruti Suzuki’s profitability was hit as increasing prices of aluminium, steel, copper and tyres led to raw material costs jumping y-o-y by 160 basis points to 77.4% of revenue. It was marginally lower by around 60 basis points on a quarter-on-quarter (q-o-q) basis. (One basis point is one-hundredth of a percentage point.) Likewise, other expenses, mainly relating to sales and marketing, increased y-o-y as a result of new launches over the year, but were lower q-o-q.
Also See Margin Pressure (Graphic)
However, MSIL’s bane in the last two quarters has been the adverse impact of currency movements. On the one hand, euro-denominated exports, which constituted around half the total exports of 35,718 vehicles during September were hit as the Indian rupee appreciated against the euro. This along with lower export volumes hit export realizations. In contrast, last year the firm gained from a lower rupee and higher demand for small cars in Europe.
On the other hand, import value surged this quarter, as the Japanese yen appreciated against the rupee. Maruti Suzuki’s imports constitute around 28% of net sales, which includes royalty payment to Suzuki Motor Corp. of Japan of around 5.1% of sales. Analysts say that only about one quarter of the firm’s currency needs are hedged to protect it against fluctuations. Despite increasing efforts towards indigenization, the rapid pace of new launches and competition on a global platform calls for imports of key components.
Given these factors, the operating profit margin (OPM) at 10.5% plummeted 220 basis points from a year ago, though it was 70 basis points higher than in the June quarter.
Of course, given the festive season in the current quarter and the rising demand for cars in the domestic market, Maruti Suzuki’s sales volumes will remain robust. On exports too, despite the fall in volumes in the first half, it is confident of matching fiscal 2010’s exports of around 147,575 vehicles during the current year. However, one may not see a big upside from its current production rate of around 110,000 vehicles a month, due to capacity constraints. Expansions would translate into revenue only in the second half of fiscal 2012.
But high sales may not translate into higher profitability, at least in the near term. According to Surjit Arora, analyst, Prabhudas Lilladher Pvt. Ltd, “concerns remain on margins due to raw material costs and an appreciating yen trend”. Also, growing competition in the domestic car segment would prevent frequent price hikes to pass on costs to consumers. Besides, higher volumes of small cars mean lower profit margins.
Maruti’s shares have underperformed the Bombay Stock Exchange Sensex and auto index in the last three-six months. They appear fairly valued as the price discounts fiscal 2012 estimated earnings about 16 times.
Graphic by Paras Jain/Mint
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