Mumbai: Shares in Maruti Suzuki, the country’s top car maker, fell more than 9% on 22 July on concerns that its margins would remain under pressure because of rising costs and greater competition.
New Delhi-based Maruti on 21 July reported a smaller-than expected 7% fall in quarterly profit to Rs4.66 billion ($109 million). Operating margin fell to about 10% from 14.6% a year earlier.
“Margins are a concern,” said Huzaifa Suratwala at IL&FS Investsmart, which is reviewing its ‘buy´ rating on the stock.
“The outlook is not good, because competition will make it hard to raise prices, so margins are likely to stay at this level for the rest of the year.”
Maruti shares were down 7.9% at Rs597 in a firm Mumbai market, after falling as low as 588 in early trade.
Maruti, 54.2% owned by Japan’s Suzuki Motor Corp, has nearly half the Indian car market, with models such as the best-selling Alto and Swift hatchbacks, and has been shifting consumers to premium models such as the DZire sedan. But the high cost of raw materials such as steel have hit margins, while firm interest rates, rising inflation and a fuel price hike have dented demand in Asia’s third-largest economy.
“Margins are not going to go back to the 14% plus levels,” said Ashutosh Goel at Edelweiss Securities.
“But we should see some improvement from here because they have been able to manage costs in the past, and they have new launches lined up which will boost sales.” Maruti is facing more competition from rivals such as Hyundai Motor, General Motors and Fiat.
It will face the greatest pressure in the small car segment, with Tata Motors scheduled to launch the Nano, priced at just above $2,500, and a venture of Bajaj Auto with Renault and Nissan building a similar car.
But a weaker rupee is boosting earnings from exports, while an increase in annual capacity to 1 million units by 2009/10 will yield greater economies of scale for Maruti, which will make A-Star cars from late 2008, and then the Splash.
“Maruti will definitely lose some market share, there is no question of that,” said Goel who has an ‘accumulate´ rating.
“But it is not going to be a cake walk for anyone else, either. Everyone is suffering.”