NEW DELHI : Net profit at Maruti Suzui India Ltd, India’s largest passenger vehicle manufacturer by sales, fell 17.2% year-on-year (y-o-y) in the December quarter, the company said on Friday, putting the result down to several negative factors coming together at once.

Net profit fell to 1,489.30 crore from 1,799 crore a year ago as retail automobile sales during the last festive season hit a six-year low amid increases in crude prices, insurance costs and high interest rates on vehicle loans. The bottomline was also hit by high commodity and staff costs, as well as mounting expenses for marketing new vehicles launched during the quarter.

Falling sales meant Maruti increased average discounts to 24,300 per unit to move unsold vehicles piling up at dealers. The average discounts were 19,200 per unit in the nine months from April to December in the same fiscal year. This, in turn, hit the financials and it missed Bloomberg’s net profit estimate of around 1,731.90 crore.

Worsening macroeconomic factors saw the number of vehicles sold by Maruti Suzuki during the quarter fall by 0.6% y-o-y to 42,8643 units. As a result, net sales only rose by 1.99% y-o-y to 19,668.3 crore.

With the sharp jump in expenses and flat growth in the top-line, profitability as measured by Ebitda (earnings before interest, taxes, depreciation and amortization) declined by 36.5% y-o-y to 1,910.5 crore and margins contracted by 590 basis points (bps) to 9.7% from 15.6% in the year-ago quarter. A basis point is a hundredth of a percentage point.

(Graphic: Sarvesh Kumar Sharma/Mint)

According to Ajay Seth, chief financial officer, Maruti Suzuki India Ltd, the third quarter was exceptional as all the negative factors impacted together.

“Some of the impacts are reversible and some of them need to be seen in the context of the market conditions. Discounts offered by the competition were much higher than what we offered. Now we have low inventory and, going forward, if the retail and wholesales match then this impact will come down," Seth said in a conference call with analysts.

Commodity costs increased by 400bps to 74% of net sales, while other expenses, including marketing and advertising for new products, increased significantly by 310 bps to 15%. As a result of a wage settlement in one of its manufacturing plants, employee cost rose by 110 bps to 4.7% of net sales, the car maker said.

Maruti Suzuki’s advertising cost went up because of the launch of a new SUV, the Ertiga, and a new version of hatchback WagonR. As result of the huge discounts, dealers released 90,000 units of unsold inventory in December. Consequently, the Delhi- based manufacturer started the January to March quarter with just 15 days worth of stocks with dealerships.

R.S. Kalsi, senior executive director, Maruti Suzuki, said although the domestic market is under pressure, there are signs of hope—the minimum support price for crops has been increased alongside a good monsoon, which may positively impact sales. “In the beginning of the year growth was expected to be 8% and till now it has been just 4% for the industry. For Maruti the volume growth has been around 7%. So we will outperform the industry," said Kalsi.

“Operating deleverage due to subdued volumes, increase in commodity prices, higher discounting, adverse forex movement led to steep drop in the margins. Given the weak operating performance, net profit dropped by 17% y-o-y and missed estimates by a huge margin. Going ahead, Maruti’s volumes and margins are likely to remain under pressure in near term as consumer sentiment continues to remain weak," said Bharat Gianani, research analyst, Share Khan.

The stock closed at 6,516.35, down 7.40%, on BSE.

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