Maruti Suzuki India Ltd’s results for the March quarter reiterated a trend displayed in the last three quarters of fiscal 2011. Cost pressures seem to have got the better of the country’s largest car maker, even as sales continue to rise.
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Operating profit margin (OPM) for the quarter fell year-on-year (y-o-y) by about 316 basis points (bps) to 10%. Margins were hit by two factors—an expected rise of about 200 bps in raw material costs, which has affected the automotive sector as a whole, and a 150 bps rise in other expenditure, which the management stated was due to research and development and maintenance expenses. One basis point is one-hundredth of a percentage point.
What shored up margins was a decline in the employee cost, which could be treated as a one-off gain on account of the write-back of higher estimated costs such as gratuity.
In fact, this is the fourth consecutive quarter in which OPM has fallen on a y-o-y basis, with the highest drop of 560 bps in the December quarter. Consequently, operating profit for the March quarter dipped by 9% y-o-y to Rs 1,009 crore. This was in spite of the robust 20% rise in volumes and 19.4% growth in revenue from the year-ago period.
Volumes grew on the back of a 27.3% jump in domestic sales, driven by increased rural penetration, which accounted for one-fifth of domestic sales, the firm stated. Exports for the quarter, however, fell 26% y-o-y, even as the share of non-European markets increased.
Maruti’s shares seemed unfettered by the fall in profitability. They closed 1.5% higher at Rs 1,326.55. The trigger was perhaps the net profit of Rs 659 crore, which although flat when compared with the year-ago period, was higher than analysts’ consensus estimates of Rs 579 crore.
Also, there was a marginal improvement in both operating profit and net profit on a quarter-on-quarter basis, mainly on account of favourable currency movements—a flattish yen and a depreciating rupee against the euro.
The uptick in share price is no reason to cheer. The management in the earnings conference said that footfall in sales outlets and the rate of conversion into customers have fallen since September.
Stress in the marketplace is on account of rising cost of ownership, unabated rise in fuel costs and heightened competition with proliferation of car makers and new models. “It may be a challenge to match rising costs through higher product pricing,” says Ajay Parmar, head of research at Emkay Global Financial Services Ltd.
However, the management allayed fears on account of the Japanese calamity, stating that there was no change in their production plan going forward. Royalty costs, too, would be maintained at about 5.5% of sales (5.1% during fiscal 2011).
Stand-alone revenue for the full year grew 25%, but cost pressures through the year trickled down to an 8% drop in net profit. At this juncture, the headwinds seem to challenge sustained profitability, which is a risk to further upsides in the stock.
Graphic by Yogesh Kumar/Mint
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