Maruti's Q2 profits get booster dose from sharp spike in margins

A low base of last year and a tight control on costs helps company beat Q2 estimates by a wide margin

The season of earnings beat continues. Maruti has stunned the market with a 195 per cent jump in net profit to Rs 670 crore. Even though the Street had built in a sharp increase in profit during the quarter, as the company was hit by a labour crisis in the corresponding period last year and the production was halted for several weeks, such a jump was not expected. The company's profitability during the quarter has beaten even the most optimistic estimate by 12-15 per cent. This has been largely driven by a spike in operating margin, which went up 670 basis points YoY and 120 basis points per cent QoQ to 12.9 per cent.

While the top line was largely in line with the Street's expectations, going by the 20 per cent year-on-year increase in volumes (sequential increase of 3.5 per cent), the surprise has really come on the margin front. The company's operating metrics have shown a significant improvement, most of which has gone on to boosting the bottom line.

Maruti has taken several measures to bring down its import content and, thereby, operating costs over the last two years. From hedging its imports to increasing localisation efforts, it has done many things to even out the impact of currency volatility on earnings. The impact of these measures is most visible in the company's second quarter numbers. Even though the company says that its profit must be seen in the context of last year's "unusually low levels of profit", a material reduction in raw material costs has helped the company beat the Street's profit estimates.

The share of raw material as a percentage of sales has fallen by 260 basis points sequentially to 69.4 per cent. This figure cannot be compared on a year-on-year basis as last year's financials did not include the Suzuki Powertrain, which is now merged with the parent company. A large part of the margin expansion has been driven by the fall in raw material costs, says Mitul Shah of Karvy Stock Broking.

Even though the company has seen a one-time payout to employees, which has impacted margins by 50 basis points, the net profit figure has come in significantly ahead of estimates. The company's also seen a Rs 105-crore benefit from currency movement and lower vendor compensation. However, some of this can be reversed in the third quarter.