Maruti to reduce import content to maintain robust profitability

Plans to cut import of material to 16% by March 2014 from 20% at the end of FY13

Maruti Suzuki India Limited (MSIL), the country’s largest car maker, is taking a number of initiatives to enhance profitability and boost margins. For one, it plans to cut import content to 16 per cent by March 2014 from 20 per cent reported at the end of the last financial year.

The auto maker, which showcased a three-fold increase in after-tax profits for the September quarter at Rs 670.23 crore, has also initiated measures to reduce material expenses to sustain robust margins despite slowing sales in the domestic market.

“Apart from aggressive localisation programmes, we are undertaking focused cost-reduction efforts, value engineering initiatives to improve yield. Material costs as a proportion of net sales have come down significantly to 72.4 per cent in the first half of FY14 compared to 80.7 per cent in the same period last year,” said a senior MSIL executive.

Cost of materials consumed by the company in the first half of this financial year declined by Rs 155.45 crore to Rs 13,773 crore (against Rs 13,928.45 crore recorded during the corresponding period last year). The reduction has come despite vehicle production increasing by 4.93 per cent to 551,081 units in the first half of FY14.

Maruti’s exports have shown an impressive increase of 66.6 per cent year-on-year to 34,024 units during the quarter ended September 2013. This would have also helped realisations during the quarter, with a sharp fall in the rupee, analysts said.

The MSIL executive agreed: “Material costs have come down significantly. Foreign exchange rates have been favourable. These are the two significant initiatives which contributed to our profits.”

The company clocked foreign currency gains of Rs 164 crore during the second quarter, which added 1.6 percentage points to the operating margin. The firm’s operating profit margin rose to 12.9 per cent during the quarter, against the 8.3 per cent in the year-ago period. The company had reported operating margins of 11.3 per cent in the first quarter of FY14.

Over the past couple of years, MSIL has taken measures to boost sales in other markets and bring down expensive import content in its vehicles. These measures are reflected in the sharp improvement in the auto maker’s profitability during the second quarter of FY14, compared to Rs 227.45 crore recorded in the year-ago period.

The company has done well on a sequential basis as well, with the after-tax profit growing by 6.1 per cent. However, the financials are not strictly comparable as the results in the September 2013 quarter include the benefits of merger with engine production unit Suzuki Powertrain India Limited (SPIL). Plus, the numbers have come on a low base as the company had a month-long lock-out at its Manesar facility in the year-ago period.