Increased competition remains a major worry for the carmaker.
Maruti Suzuki, the country’s largest carmaker, reported a surprising drop in profit for the quarter ended June 30, 2010. This was the first drop in profit in the previous five quarters.
The net profit for the quarter fell by 20% to Rs 465.4 crore. The figure was lower than the Rs 670-crore average of 24 analyst estimates compiled by Bloomberg.
The profit fell despite the fact that net sales for the quarter were up by 27% to Rs 8,050.7 crore. Maruti also sold 25% more cars at 283,324 units.
The fall in profit is due to a host of reasons, including royalty payments to the parent Suzuki Motor Corporation. Maruti’s net profit was driven down because of new model launches (full model change for the WagonR during the quarter under review) and the consequent increase in royalty payment to Suzuki.
The company paid Rs 188.7 crore royalty during the quarter, including Rs 65.15 crore for the period from December 16 2009 to March 31, 2010.
The use of new, K-series engines in most cars also led Maruti to pay comparatively higher royalty to the parent company. Suzuki owns 54.2% in the company. The company, however, did not disclose the royalty payments in the comparable period of the previous fiscal.
“This quarter seems to be a bottom for the company,” said Surjit Arora, auto analyst with Prabhudas Lilladher. “Going forward, we expect margins to improve because sales are still strong. The extra-ordinary other expenses due to royalty payments will most likely not be there in future quarters, though currency fluctuations will have to be watched,” Arora said.
The crisis in the PIIGS (Portugal, Ireland, Iceland, Greece and Spain) countries, which led to the euro depreciating against the Indian rupee, also impacted the net profit.
The euro also depreciated about 6.5% against the rupee in the quarter, hitting Maruti’s exports, which account for up to 15% of the company’s earnings.
Europe accounted for as much as 80% of the company’s export revenue, chief financial officer Ajay Seth had said in April.
A 54% fall in other income to Rs 100.2 crore did not help either.
Over and above this, the company did not seem to get any benefit of scale. The raw material costs grew in line with overall sales.
Though its officials have said in the past that raw material contracts are being negotiated and any decision in price hikes will have to wait, analysts point out that price increase to offset rising costs may be imminent.
Maruti spent Rs 6,080 crore to buy steel, aluminum and other raw material in the quarter, up 26% from the same quarter in the previous year.
“Raw material prices have been a severe problem for auto companies,” said Umesh Karne, a Mumbai-based analyst at Brics Securities Ltd, who has an ‘underperform’ rating on Maruti’s shares. “Increased competition is preventing the company from raising vehicle prices to absorb this cost.”
During the quarter, the company’s market share also fell to 47.59% from over 55% earlier in the 15-lakh-units-per-annum domestic passenger car segment. It had sold 2,06,377 units during the quarter in a total market of 4,33,641 units.
Increased competition remains a major worry for the company, which is facing intensifying competition from the likes of South Korea’s Hyundai Motors, the second-largest car maker in India, as well as domestic rivals such as Tata Motors.
Other recent entrants into the local compact car market are also snapping at Maruti’s heels.
Toyota has said it would treble sales next year, while Ford’s Figo, General Motors’ Chevrolet Beat minicar and Volkswagen’s Polo hatchbacks have met with a good response.s
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