It isn’t just labour troubles that are a source of concern at Maruti Suzuki India Ltd. Following the news of a violent labour unrest leading to a lockout at one of its prime factories (Manesar, in Haryana) a few days ago, the company posted disappointing results for the June quarter on Saturday. Net profit fell steeply by 22.8% from the year-ago period to Rs 423.8 crore, around 15% below Bloomberg’s consensus estimates. It was the company’s fourth consecutive fall in quarterly net profit.
The June quarter’s profit contraction was in spite of a 27.5% jump in net sales to Rs 10,778 crore, a result of a huge 21% increase in net realization.
This, in turn, came from price increases and a better product mix, with higher sales of higher value products such as Swift, Dzire and Ertiga.
Even then, the operating margin fell by 230 basis points (bps) from a year ago to 7.3%. One basis point is one-hundredth of a percentage point. “A 140 bps increase in royalty expenses and the impact of a stronger yen versus the Indian rupee which made import of raw materials more costly, along with higher power and fuel costs, led to this,” says Yaresh Kothari, analyst, automotive, Angel Broking Ltd.
Operating profit was 3.5% lower at Rs 786.3 crore. The shutdown at Manesar, if prolonged, will hit profitability further. While the firm had shifted its assembly line of Swift and Dzire models to its Gurgaon plant last year, the supply of components continued from the Manesar unit, affecting production of high-end models.
Analysts’ estimates point to a loss of Rs 90 crore a day, assuming a daily production loss of 1,800 cars.
What’s more worrisome is that if the issue of labour unrest is not resolved soon, it may affect consumer demand leading to a shift in brand loyalty.
Further, the company may lose out on the festive season demand. A report by Karvy Stock Broking Ltd highlighting 2011’s prolonged labour strike said, “Thirty percent of the customers would have switched to other brands due to the high waiting period for the product. The company’s total volumes fell 10.8% year-on-year (y-o-y) to 1.1 million units in FY12, as against industry growth of 9% y-o-y.”
More importantly, would the firm have to restructure and renegotiate with its workforce? Data indicates that Maruti’s staff costs have increased in absolute terms over the years, with more employees added to support expansions. However, staff costs as a percentage of sales, at around 2.4%, is among the lowest in the domestic auto industry. It is around 5-5.5% in the case of peers such as Tata Motors Ltd (domestic) and Mahindra and Mahindra Ltd (M&M).
If staff costs have to be aligned with the industry norms, it could imply higher cost pressures for Maruti at a time when growth rates in the industry are being threatened.
Sadly, the country’s largest car maker has seen an earnings erosion that hit shareholder return during the peak auto boom period.
The compounded annual growth rate (CAGR) in earnings from fiscal 2009 till fiscal 2012 was barely 1.3%, when others such as M&M clocked a CAGR of 35.5%. Of course, earnings in the domestic entity of Tata Motors, too, registered barely a percentage point growth, which was boosted by Jaguar Land Rover .
The June quarter drop in earnings will precipitate the negative investor sentiment. The stock trades at around 14 times fiscal 2013 earnings. At this juncture, one can only hope that against a backdrop of sluggish sectoral growth, a permanent solution to the labour unrest is found.
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