Maruti Suzuki India Ltd Faces Margin Pressures Due to Increased Expenses

Maruti Suzuki India Ltd delivered increased profit for the fifteenth straight quarter in the March quarter. However, the company’s earnings fell shy of estimates. This is primarily due to lower than expected margins apart from increased effective tax rate. Following the unimpressive results, the stock fell 1.98 percent in the NSE whereas it dropped 1.9 percent in the BSE to finish the day. However, this did not have any impact on Tata Motors that gained 1.94 percent and 1.98 percent in the NSE and BSE respectively. The company is yet to announce its results.

Profit Growth

Maruti reported 10 percent year-on-year growth with net profit to Rs.1,882 crore for the fourth quarter, which is lower than the Bloomberg consensus estimate of Rs.2,085 crore, Bloomberg Quint reported. The profit miss is attributed to increased finance costs and tax outgo. The company was jointly promoted by the Indian government and Japan-based Suzuki Corporation. Though it was a 50:50 venture in 1991, the Japanese company later increased its stake to 56.21 percent after persuading the government to reduce its stake.

India’s biggest automaker’s margins expanded modestly to 14.2 percent in the fourth quarter. This is well lower than the predicted 15.6 percent level. The fall is attributed to increased advertising and commodity costs apart from other expenses. The operating income jumped 18 percent to Rs.3,015 crore from the previous year. Incidentally, this also fell short of expectations.

In a press release, Maruti Suzuki stated that “The operating income rose on account of higher sales volume, cost reduction efforts, partially offset by adverse commodity prices and higher advertisement expenses.” Joindre Capital Services’ research head, Avinash Gorakshakar, told Bloomberg that any margin improvements could be expected only in the second six-month period of the current financial year. This will be driven by a combination of volume growth and price hikes.

The company’s top line saw a 15.5 percent increase to Rs.21,166 crore from the previous year period. This is modestly better than the predicted revenue of Rs.20,975 crore. The company’s revenue was driven by 11.4 percent sales uptick from the year-ago period. The March quarter saw the company selling 4.61 lakh units driven by hatchbacks like Vitara Brezza compact SUV and the Swift.

Other Key Factors

Maruti indicated that realizations advanced 3.6 percent from the previous year quarter while market share expanded to 50 percent in the latest period. Higher aluminum and steel prices were the main reasons behind the increased commodity costs. Efforts to reduce costs were partly compensated by the adverse impact of commodity prices. As far as royalty, it fell to 5.4 percent in the latest quarter from 5.8 percent in the previous year period.

Maruti board has given its approval for establishing two funds that included employee welfare fund. The company would transfer one percent of its net profit to each fund. The second fund will focus on scientific work, and the details will be worked out. Its board recommended Rs.80 per share as a dividend to its shareholders.

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