Maruti Suzuki India, the country’s largest carmaker, on Friday posted a 27.3 per cent drop in net profit for the April-June quarter amid an industry-wide slowdown in demand, even as it beat analysts’ estimates. The company reported a net profit of Rs 1,435 crore in Q1FY20, compared to Rs 1,975 crore in the year-ago period.
In a post-results call with analysts, the management said it was not sure when demand would pick up, and that they would be careful not to dump excess inventories on the dealers. In view of the slowdown, Maruti had undertaken a review of its distribution channels, which helped bring down inventory levels with dealers to 30 days.
The decline in consumer interest is manifested in Maruti’s balance sheet — net sales in the first quarter fell 14.1 per cent to Rs 18,735.2 crore, compared with Rs 21,810.7 crore in the corresponding period last year.
Due to an increase in other income and decrease in other expenses, the carmaker managed to beat the net profit and revenue estimates of Bloomberg at Rs 1,338.9 crore and Rs 19,069.2 crore, respectively.
The firm also witnessed a sharp rise in overall expenses as a result of an increase in raw material and depreciation and amortisation costs. Raw material expenses surged by 410 basis points (bps) to 75.1 per cent of the net sales, while depreciation and amortisation costs increased by 160 bps to 4.9 per cent of its revenue. Employee costs also increased by 110 bps during the same period.
Due to the higher costs and overall slowdown in sales, operating profit, or earnings before interest tax, depreciation and amortisation fell sharply by 38.8 per cent year-on-year to Rs 2,047.6 crore. Consequently, the company’s operating margin contracted by 455 bps to 10.92 per cent from 15.36 per cent in the year-ago quarter.
Other income during the quarter increased by 179.9 per cent to Rs 763.3 crore and helped the company arrest the decline in its bottom line. Cost-cutting methods exercised by the company and lower royalty payment to its parent, Suzuki Motor Co, owing to lower sales brought down other expenses by 4 per cent to Rs 2,740.4 crore.
According to CFO Ajay Seth, retail sales were under pressure and the firm managed to keep operating expenses in control due to several cost-cutting exercises, including reducing advertisements and cutting down on royalty payments to Suzuki. “There is significant uncertainty in the market and if we see some policy intervention, then there are chances of some recovery in demand,” Seth said during a conference call with analysts.
“Maruti’s strong product pipeline, the success of new launches, and leadership and strong management capability would benefit the company’s profitability. After clarity from the management, we may revisit our estimates and view on the stock,” said Mitul Shah, research analyst, Reliance Securities.