Maruti disappoints1 min read . Updated: 27 Apr 2010, 12:27 PM IST
The markets’ expectations from Maruti Suzuki India Ltd have been running low for the past six months or so. The company’s shares have fallen by 19% since October,
Given this backdrop, analysts were expecting growth of 5% in the company’s net profit on a sequential basis, even though volumes grew by around 11%. As it turns out, the company has not met even those low-key expectations. Maruti has reported a net profit of Rs656.6 crore, around 5% lower compared with the December quarter and 9% lower than the average of 22 analyst estimates compiled by Bloomberg.
In the past, the company could have passed a large chunk of this increase in costs to customers. But thanks to increased competition, and the launch of a number of small cars at competitive prices, its ability to pass on costs is restricted.
Besides, prices had to be raised by 2% in March owing to an increase in excise rates as well. So when it was time to pass on some of the cost increase owing to higher input costs and due to the upgrading work to meet new emission norms in April, the company chose to increase prices by just 1%.
The pressure on margins is expected to continue this fiscal. But this concern seems to be factored into Maruti’s shares, which now trade at 15.4 times trailing earnings. And though a drop in margins may check earnings growth, volumes continue to grow at a strong pace and could well drive earnings this year. Having said that, sentiment for the stock continues to be weak owing to the strong competitive environment, and a re-rating would depend on the company’s ability to take further price increases.