Home >Markets >Mark To Market >After Maruti’s Q1 profit miss, all eyes are on its margin trajectory

Maruti Suzuki (India) Ltd’s June-quarter results were impacted by the covid-led lockdown as anticipated. Q1 sales volumes declined 28% sequentially after three successive quarters of strong improvement registered by the company. Revenues declined at the same rate to 17,776 crore.

According to analysts, realizations improved marginally, although it wasn’t sufficient to take care of cost pressures. Rising commodity prices continued to hurt margins. Raw material costs stood at 79% of net sales in Q1FY22, up from 77.2% in the previous quarter. Employee cost, other overheads and depreciation costs saw a sharp rise, which is attributed to higher expenses during the covid-19 pandemic and expanded capacity in Gujarat.

The upshot: Ebitda at about 820 crore declined by a steep 59% sequentially and was lower than analysts’ estimates. Analysts at Reliance Securities Ltd, for instance, had expected an Ebitda of 870 crore, while those at Motilal Oswal Financial Services Ltd had pegged it at 900 crore. Analysts attributed the miss to commodity cost inflation and pricing pressure.

A  steep rise
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A steep rise

Moving forward, the recovery in volumes is expected to pick-up again, as demand for personal mobility remains strong. The firm said it is already seeing a strong rise in enquiries and bookings in July, indicating continued recovery since June. Its low channel inventory is also supportive from the volumes perspective, with firm demand in June, but supply-side constraints remain. Analysts, nevertheless, said they will be watchful on the ramp-up in SUV sales, given rising competition.

The concern, however, will remain elevated on margins amid rising commodity prices. Though the firm has been taking price hikes (about 1.3% in January followed by 1.6% in April), covid disruptions are likely to put a cap on price hikes. The firm will be cautiously taking hikes so that demand is not impacted, said analysts. Even so, a small price hike was taken by the company in July.

Mitul Shah, head of research at Reliance Securities, expects the domestic passenger vehicle (PV) industry to record double-digit volume growth in FY22, which would support Maruti’s business. He also expects sales of premium products recovering as the situation normalizes gradually.

“Strong expected volume growth bodes well and should help drive growth; however, margins in the near term are still expected to be suppressed," said Aditya Makharia, institutional research analyst, HDFC Securities Ltd. Healthy passenger vehicle sales over the next two years owing to low penetration and rising affordability, strong product portfolio across markets, strong return ratio and healthy balance sheet are key positives for the company, said analysts.

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