Maruti shares skid 12% as profit outlook worsens

Shares in Maruti Suzuki tumbled as much as 12% as India's top carmaker spooked investors with a surprise rise in royalty payments to its parent, forcing analysts to slash growth estimates for the company.

On Saturday, Maruti unexpectedly reported a 20% fall in net profit in April-June, hit by high raw material costs, an increase in royalty payments, and a weakening of the euro which hurt export revenues.

Analysts had expected a 20% rise in earnings. Maruti, in which Suzuki Motor owns 54.2% stake, has also seen competitors such as Hyundai Motors and Ford Motor Company eat into its dominant market share.

"As it is, the market is worried about the rising competition in Maruti's core product group. The royalty issue took people by surprise," said Sandip Sabharwal, chief executive of portfolio management services at Prabhudas Lilladhar.

Maruti's market share in India, where the growth rate is tapering, slipped to 56% in April-June from 61% a year ago.

About two months ago, India scrapped a ceiling on royalty payments by local companies to their overseas partners. The cap had been at 5% of sales on domestic revenues and 8% on export revenues.

Following the rule change, Maruti entered into a new royalty agreement with Suzuki Motor. Sabharwal, who doesn't hold Maruti shares for his clients, said he plans to avoid the stock until clarity emerges about the royalty issue.

Ahead of the results, 22 analysts had a buy or strong buy on Maruti, while 14 had a hold, sell or strong sell rating.

India's robust economy is boosting demand for vehicles, but companies expanding their operations and higher costs linked to tougher emission rules and rising prices of raw materials such as steel are worries for the sector.

"Raw material costs have been easing, but the effect of higher royalty payments will be there in the next few quarters," said Jatin Chawla, auto analyst with the institutional desk of India Infoline.

Shares in Maruti, with a market value of $8.3 billion, slumped as much as 12.1% in their biggest intra-day fall in more than six years as brokerages such as UBS, Bank of America, Merrill Lynch and Macquarie downgraded the stock.

By 07:45 GMT (13:15pm IST), its shares had fallen 10.7% to Rs1,213.5. The broader market was down 0.4% and the auto sector index, 2.5%.

Trading volume in Maruti shares, viewed by some investors as a proxy for the fast-growing Indian auto sector, surged to 1.06 million shares, 12 times its average full-day volume traded over the past 30 days.

Maruti stock has fallen 16.6% so far this year, lagging a sector index which has risen nearly 11%, while the main index has gained about 3.8%.

Other auto firms in India which have an overseas partner are also expected to be hit by the change in royalty fees. Shares in India's largest motorcycle maker, Hero Honda, in which Honda Motor Corp owns 26%, fell nearly 7%, analysts said.

"I would expect that Hero Honda would be subject to a higher royalty because it is doing very well in India," said Deepesh Rathore, analyst with IHS GlobalInsight.

"Honda has been using Hero [Honda] as a cash cow for its other ventures in India, and I would think a re-working of royalty arrangements there would also be expected," Rathore said.

Denying a media report, Honda said today it had no intention of selling any part of its stake in Hero Honda. Honda has a wholly owned unit, Honda Motorcycle and Scooters India Ltd, as well as a joint venture that makes passenger cars called Honda Siel Cars.