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Business News/ Market / Mark-to-market/  Will investors punish Maruti for its huge profit shortfall?
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Will investors punish Maruti for its huge profit shortfall?

Given the huge variance between estimates and actual performance, the stock, which has been a favourite among, may be wobbly in the near term

The fact that some one-off costs hit profit may provide some comfort to investors. Photo: ReutersPremium
The fact that some one-off costs hit profit may provide some comfort to investors. Photo: Reuters

Car maker Maruti Suzuki India Ltd’s stock may well take a beating when markets open on Friday, although the fact that some one-off costs hit profit may provide some comfort to investors.

The company’s December quarter results were far below analysts’ expectations. Its net profit of 1,019.3 crore, though 20% higher than a year ago, was about 24% short of Bloomberg’s consensus estimate of 1,333.3 crore.

The shock was all the more great because the country’s largest car maker has been an outlier, beating the industry average both in terms of sales and stock performance.

Interestingly, revenue was higher than the Street forecast, with volumes rising by 16% and per unit realizations improving.

What then went wrong with analysts’ profit estimates?

The single largest contributor was soaring costs. Raw material costs fell as a percentage of sales, thanks largely to falling commodity prices, but not as much as anticipated. The management blamed higher discounts and also a drastic dip in inventory.

That was not all. Employee costs rose too as the company increased provisioning for higher bonus payout in keeping with the new Bonus Act. Also, Maruti Suzuki’s strategy to stay ahead of competition with new models and new dealer outlets added to advertising and marketing expenses. Royalty expenses too were marginally higher than forecast.

Although the costs may be justified because of the challenges in the car market, they took a toll on profitability. For investors who had become accustomed to a cushy 16% operating margin for several quarters, 14.5% was a huge letdown. Sure, margins are still 117 basis points higher on a year-on-year basis, but the investors were factoring in far higher margins thanks to benign commodity prices. A basis point is 0.01%.

Even other income, which could have shored up net profit, was lower compared with a year ago. One cannot, therefore, rule out a marginal dip in earnings estimates for fiscal 2016 and 2017. But if the sales momentum continues, some of these costs will get absorbed and profitability can come back on track.

Also note that most of these expenses appear to be one-offs. In sum, given the huge variance between estimates and actual performance, the Maruti Suzuki stock, which has been a favourite among the auto pack, may be wobbly in the near term.

The writer does not own shares in the above-mentioned companies.

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Published: 28 Jan 2016, 10:31 PM IST
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