Earnings hit by commodity prices, royalty payments and fall in euro.
Maruti Suzuki, India's top car maker, reported a 20 per cent fall in net profit in the quarter to June, hit by high raw material costs, an increase in royalty payments, and a weakening of the euro which hurt export revenues. Its profit for the quarter stood at Rs 456.36 crore, down 20.3 per cent from Rs 583.54 crore in the same quarter of the previous year.
The last time the company's net profit had declined was in the fourth quarter of 2008-09, when it had fallen 6.5 per cent to Rs 465.85 crore. That was the time when the economic slowdown was at its peak. Car sales had revived from April 2009.
The decline in net profit happened even though Maruti Suzuki’s net sales during the quarter shot up 26.7 per cent to Rs 8,231.53 crore from Rs 6,493 crore in the year-ago quarter. Its quarterly sales were up 25 per cent to 283,324 units.
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“The drop in net profit is due to higher commodity prices, increase in royalty and lower other income. In addition, income from exports to Europe fell due to weakening of the Euro,” the company said in a statement. Maruti Suzuki, owned 54.2 per cent by Suzuki Motor Corporation, paid a royalty of Rs 188.7 crore to its Japanese parent in the quarter. According to VG Ramakrishnan, senior director (automotive practice), Frost & Sullivan, the higher royalty has come on the back of the K-series engine technology it has transferred to almost all its models following the new emission norms in the country which came into effect from April 1, 2010.
Raw material cost as compared to sales went up to 79.6 per cent in the quarter ended June 2010 vis-à-vis 78.1 per cent in the corresponding quarter last year. “While a cumulative increase of 3 to 7 per cent in commodity prices has certainly impacted the profit margins, the company is under tremendous pressure to keep up sales and therefore has been offering higher discounts which have further impacted its profitability,” Ramakrishnan said.
The Euro also depreciated about 6.5 per cent against the rupee in the quarter, hitting exports which account for up to 15 per cent of Maruti Suzuki's earnings.
Some analysts said the next few quarters could be good for the company. “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 from here on because sales are still strong. The extraordinary other expenses due to royalty payments will most likely not be there in future quarters, though currency fluctuations will have to be watched.”
Other recent entrants into the local compact car market are also snapping at Maruti Suzuki'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.
