Home >Companies >Company-results >Maruti Suzuki beats estimates with 23% rise in June quarter profit

New Delhi: Maruti Suzuki India Ltd’s quarterly profit rose 23%, beating analysts’ estimates, as the nation’s largest car maker benefited from lower material costs and a surge in income from activities other than its core business operations.

Net profit rose to 1,486.20 crore in the fiscal first-quarter ended 30 June from 1,208.10 crore in the year earlier, the company said on Tuesday. That compares with 1,224 crore profit estimated by a Bloomberg survey of 29 analysts. Net sales rose 12.1% from a year ago to 14,654.50 crore.

Maruti’s sales growth came even as it was forced to suspend production in June after a fire gutted the factory of vendor Subros Ltd, which makes air conditioning equipment. The disruption caused a production loss of around 25,000 units at a time when Maruti has seen high demand for its Vitara Brezza and Baleno models, leading to even longer waiting periods for its customers.

“The bottomline uptick is due to other income, which is just accounting adjustment prompted by Ind-AS (the new accounting norms). What happens is that mutual funds investments that they have, they normally show it as cost. Now they have been told to show it as NAV (net asset value)," said Mahantesh Sabarad, deputy vice-president (research), SBICap Securities Ltd. “A strong franchise in the form of Nexa (the dealerships that sell higher value Maruti cars) and its ability to maintain market share keep us positive on Maruti’s prospects."

Still, Sabarad has downgraded the stock from ‘buy’ to ‘hold’ because of the sharp increase in the share price.

On Tuesday, shares of Maruti fell 1.44% to 4,485.25 on the BSE, while the exchange's benchmark Sensex lost 0.42% to 27,976.52 points.

ALSO READ | Maruti Suzuki: Roadblocks in June quarter dampen investor sentiment

Maruti sold 348,443 units in the June quarter, a 2.1% increase from the year-ago period. Sales in India rose 5.4% to 322,340 units.

“The growth in the first two months of the quarter had been 10.2% but the unfortunate incident of fire at a key vendor of the company resulted in lower sales in June 2016," said Maruti.

During the course of the year, Maruti will make efforts to recover the lost production, chief financial officer Ajay Seth said in a conference call with investors.

Adverse foreign exchange movement also hurt profit, as one-sixth of the car maker’s costs (including royalty) is yen-denominated.

The Japanese yen has strengthened against the dollar in the past three months. A strong yen makes imports from Japan costlier.

On Tuesday, the Japanese currency touched 104.36 to a dollar. Maruti pays about 5-6% of sales as royalty to parent Suzuki Motor Corp. and imports materials from Japan.

Maruti reiterated that it looks to grow its sales in “lower double digit" during 2016-17, outpacing the 8-9% growth estimate for the overall passenger vehicle industry.

Passenger vehicle sales are on a rebound in the country after annual sales declined once and grew in low single digits thrice in the last four years.

Sales have picked up, largely because of lower interest rates on car loans and a decline in fuel prices. Between July 2015 and June, car loan rates have dropped by 65 basis points for public sector banks and 25 basis points for private banks. One basis point is one-hundredth of a percentage point.

The prediction of better-than-average monsoon rainfall has fanned hopes of faster growth. The India Meteorological Department (IMD) and private forecaster Skymet Weather Services Pvt. Ltd have predicted above-normal rain in the June-September southwest monsoon after two consecutive years of drought. This is likely to help Maruti as it has strengthened its presence in rural areas.

Still, a pickup in sales in rural areas may take longer because of the extent of distress among farmers.

Maruti said that demand scenario in the rural parts of the country has not recovered at all.

“New model launches, growth in top cities have driven demand. Rural demand has been sluggish... Whatever growth we got was urban," said Seth. “Monsoon has been good so far. It will have a good impact on the sales throughout the year," he added.

Latest data from IMD shows that the rainfall deficit in the entire country is now nil and that 75% of the country has received normal-to-excess rainfall so far this season.

Implementation of the recommendations of the Seventh Pay Commission for government employees may also boost demand.

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