New Delhi: Maruti Suzuki India Ltd, the country’s largest car maker, reported a 5.4% decline in net profit for the September quarter as labour unrest hit production and it was forced to increase promotional spending to push sales in a sluggish market.
add_main_imageThe stock rose however as investors considered the company had done well despite internal difficulties and external conditions. A month-long lockout at Maruti’s Manesar plant—following a riot that left one company executive dead and about 100 injured—resulted in a production loss of at least 77,000 units.
Net profit in the three months ended 30 September fell to ₹ 227.5 crore from ₹ 240.45 crore in the year-earlier period, said the company that has a 36% share of India’s car market. Revenue rose 8.5% to ₹ 8,070.1 crore from ₹ 7,435.8 crore a year ago.NextMAds
The company had to spend heavily on promoting its cars to drive up sales. Car sales in India have been sluggish as slower economic growth, and high interest rates and fuel prices force consumers to delay purchases. The economy grew by a modest 5.5% in the quarter ended June after expanding 5.3%, a nine-year low, in the preceding three months.
“During the festive season, we have seen some recovery in market sentiment helped by higher marketing spend and discounts,” said Mayank Pareek, managing executive officer (marketing and sales). “We believe the second half of the fiscal will be better as external environment is slightly positive after reforms.”
Profit was also hit by lower non-operating income, the company said. While operating profit rose 15.4%, higher depreciation (30.4%) reduced net profit.
“Operationally, results are largely in line,” said Bhaumik Bhatia, sector analyst, IDBI Capital, a Mumbai-based brokerage. “Operating performance was marginally ahead with Ebitda (earnings before interest, taxes, depreciation and amortization) margin at 6.1%, led by lower-than-expected other expenditure due to mark-to-market reversal of ₹ 38 crore on royalty.”
Maruti continues to witness subdued interest in its cars, mostly petrol models, because of the high cost of credit and rising fuel costs. Demand for diesel vehicles remains healthy as the fuel is cheaper than petrol despite a recent increase in diesel prices. At least 125,000 diesel cars are yet to be delivered to buyers.
The Society of Indian Automobile Manufacturers cut its car sales growth forecast on 10 October to as low as 1%. The annual forecast for growth in local car sales was cut to 9% in July, from an earlier estimate of 10-12% in April.sixthMAds
Auto stocks have been in a free fall because of the depressed market. Maruti’s stock, after declining 9% in August from ₹ 1,369.90 in April, clawed back in September to ₹ 1,349.90. On Tuesday, the stock closed 2.27% higher at ₹ 1,394.55 while the benchmark index Sensex fell 1.1% to 18,430.85 points.
To draw buyers during the quarter, Maruti offered discounts of ₹ 14,750 a car, which is at least 17% more than it did in the second quarter of the previous fiscal year.
Besides the discounts and higher marketing spending, increasing raw material costs and a rise in the wage bill following the lockout depressed the quarterly numbers.
“Margins will be impacted by 15-30 basis points (bps) over the next two years as a result of the new wage settlement with workers,” said Ajay Seth, Maruti’s chief financial officer. “Even the benefits of lower commodity prices did not come due to weak rupee.” A basis point is one-hundredth of a percentage point.
Wage costs as a percentage of net sales went up 64 bps to 2.9% in the second quarter from the preceding three months.
The impact of foreign exchange (forex) for the quarter stood at ₹ 350 crore, according to Seth. The losses were mainly on account of the rupee’s depreciation against the dollar.
“But we managed to cover up the impact of forex fluctuation by price increase and cost reduction measures that we have taken,” Seth said.
Maruti aims to reduce its import bill by three-fourths in the next three years, seeking to protect itself against unfavourable exchange rate fluctuations that dent profitability. The company wants to lower its net imports to $400 million (around ₹ 2,200 crore) in the year to March 2015 from $1.7 billion. Mint reported this on 5 September.
Components sourced from local vendors make up as much as 96% of Maruti cars. But at least 30% of these parts is imported by the vendors, who are compensated by Maruti for any adverse currency fluctuations.
Half of Maruti’s foreign currency exposure is yen-denominated. It has exposure to the yen on account of direct imports of parts and raw materials from Japan, royalty paid to parent Suzuki Motor Corp., and imports by its vendors.
Maruti expects the December quarter to be better.
“We will be helped by price increase that we took in October, discounts will get normalized, and volumes will come back on track with better product mix,” said Seth. “Negative aspect will be foreign exchange. We hope it does not get volatile.”
Bhatia of IDBI Capital, too, said the ongoing quarter will be better for Maruti. “One thing that could hurt them is the lumpsum royalty that they will have to pay to Suzuki for the new Alto as it’s completely developed from scratch,” he said.
Maruti launched a new version of its best-selling Alto small car earlier this month and has already got bookings for at least 30,000 units.
Maruti will push ahead with a ₹ 3,500 crore capital expenditure plan to boost its capacity for diesel engines by setting up a plant at its facility in Gurgaon. A part of the amount will also be spent on research and development.
With production of the A-Star resuming at the Manesar plant, Maruti expects exports to pick up and aims to increase the share of exports to 15% of net sales from 11% currently.
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