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False start for Maruti

False start for Maruti
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First Published: Tue, Jul 22 2008. 12 23 AM IST

Updated: Tue, Jul 22 2008. 12 23 AM IST
Although most automobile companies had reported decent volume growth in the June quarter, it remained to be seen how much of that would translate into profit growth. After all, raw material costs had soared and companies had little leeway with pricing.
If Maruti Suzuki India Ltd’s results are any indication, most auto companies are likely to report a drop in profit despite rising volumes. Maruti’s volumes had risen by as much as 13.5% and average realizations improved by 6.5% owing to change in product mix. Still, operating profit adjusted for a mark-to-market forex loss fell by 17% year-on-year. Even the most bearish analysts were negatively surprised by the results.
Raw material costs jumped by 240 basis points as a percentage of revenues year-on-year and by 117 basis points quarter-on-quarter. One basis point is one-hundredth of a percentage point.
The increase in the price of steel and other commodities has taken a large toll on the company’s finances.
Analysts were also concerned about the 188 basis point year-on-year jump in manufacturing, selling and administrative expenditure (or other expenditure adjusted for the forex loss).
True, other expenditure fell by about 100 basis points on a quarter-on-quarter basis, but according to an analyst, that’s less than the drop of 150-200 basis points usually seen between the March quarter and the June one.
The company’s overheads have been inching up because of higher royalty payments to Suzuki Motor Corp. and an increase in fuel costs. Staff costs also rose sharply because of employee additions and a bonus payout.
While the company has given reasons for the drop in margins, the fact remains that most analysts were caught unawares and will have to revise their earnings estimates downwards.
This calls into question the sharp rise in Maruti shares in the recent market recovery. The company’s shares jumped by 18% in the past three trading sessions, double the rate at which the broad market has risen.
Valuations seem reasonable at around 11 times trailing earnings, but if core earnings are going to decline by about 17%, like they did in the June quarter, that too would look expensive.
Provisions for government bond holdings hit PSU bank profits
One common thread runs through the June quarter results of public sector banks. Most of them have posted dismal results, primarily after setting aside money to cover the depreciation of their government securities portfolios.
Government bond yields—which move in the opposite direction to price— have increased by between 74 and 168 basis points across maturities compared with the March quarter, and banks have had to make significant provisions for the depreciation of their holdings. One basis point is one-hundredth of a percentage point.
Canara Bank, which declared its results on Monday, posted a drop of 49% in its fiscal first quarter net profit compared to the year-ago period, although profit before tax and provisions was up 14.95% year-on-year. Similarly, Allahabad Bank had a 53.4% drop in its net profit, although profit before tax and provisions was up 6.18%.
Or consider the three State Bank of India associates that have declared their results so far. State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore all saw their net profit for the June quarter fall, although all of them posted growth in profit before tax and provisions.
For Indian Bank, growth at the net profit level has been a mere 2.6%, while it was a strong 32.4% at the operating level.
Analysts had pointed out that Indian Bank’s portfolio was relatively insulated on account of higher provisions made in the past.
However, there is no uniformity on how banks performed by other yardsticks. Some have posted higher net interest income while others haven’t; some have seen slightly higher non-performing assets, or NPAs, but others have seen their net NPA levels come down.
Finally, interest expended as a percentage of interest earned, declined compared with the March quarter for banks such as Allahabad Bank and Canara Bank, despite the rising cost of funds.
In short, the biggest negative, by far, for public sector banks’ performance in the June quarter has been the rising depreciation provisions. As the Canara Bank management put it, its net profit growth would have been 54%, but for the sharp increase in bond yields.
Sharp spike in SAIL’s price realizations unsustainable
The public sector Steel Authority of India Ltd (SAIL) surprised the street with a sharp improvement in the average price realization for the June quarter from the preceding three months.
The company’s average realization rose by about 11% over the March quarter, which is interesting because government curbs on price increases were effected in the last quarter.
According to one analyst, the price-increase curbs became effective sometime in early May, and so the company would have benefited from at least one month of good realizations. However, that hardly explains the 11% rise in realization, he says.
The only explanation could be a change in the product mix, where higher sales of value-added products spruce up the average realization. However, the company’s profit margin was under pressure because of a sharp rise in raw material costs, which doesn’t really tie in with the theory that sales of higher-value products picked up.
In any case, the company’s performance in the April-June quarter can be seen as an aberration. The government curbs on pricing are expected to affect SAIL’s performance in the coming quarters, especially because prices of raw material are showing no signs whatsoever of falling.
The company will renew its contracts for imported coal this quarter, and this will lead to a further jump in costs. And with selling prices frozen by the government, the obvious outcome will be a drop in profit for the rest of the year. What makes matters worse is that demand, too, could fall with the slowdown in the economy.
Write to us at marktomarket@livemint.com
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First Published: Tue, Jul 22 2008. 12 23 AM IST