Maruti: In the slow lane

Lower sales volumes, higher raw material costs and a stronger yen have dented the car maker’s profits.

Why the Maruti Suzuki stock rose nearly 5 per cent on Thursday, after the company announced such disappointing numbers for the December 2008 quarter, is a bit of a mystery.

Profits for India’s biggest car maker crashed 54 per cent to Rs 214 crore, partly hurt by a stronger yen which appreciated nearly 50 per cent against the rupee. While fuel prices may have been lowered, it’s unlikely that it would prompt people to rush to showrooms just yet.

Indeed, it doesn’t seem like the worst is over; if anything, the outlook for passenger cars seems a tad worse than it did a couple of months back. The Street probably feels that falling steel prices may help improve operating margins, which came off by about 800 basis points to just under 7 per cent in the December quarter.

The good news was that average realisations were up nearly 11 per cent, arresting the fall in sales to just short of 3 per cent, despite volumes coming off by 14 per cent. Obviously, the product mix is shifting in favour of more profitable cars, although a major portion of cars sold are smaller ones.

What really impacted profits though was the higher expenses on raw materials ----up 300 basis points y-o-y net of the yen appreciation---as also spends on selling and distribution.

While Maruti does have a strong line-up of models, competitive pressures are huge and it’s possible that the benefits of lower steel prices that are expected to come through in the current quarter, will be offset by lower selling prices or higher discounts that will be needed to persuade customers to buy its cars.

Maruti has hiked prices for some of its models in order to pass on the high cost of inputs. But with the economy not looking like recovering in a hurry, volumes — which were down 1.7 per cent between April and December — could be under further pressure.

With a 54 per cent market share and a strong range of models, Maruti should manage to end the current year with revenues in the region of Rs 20,000 crore, an increase of around 11.5 per cent over 2007-08. Profits, however, are now expected to be in the region of Rs 1200 crore, far lower than the Rs 1,700 crore posted last year.