India’s top car maker Maruti Suzuki posted a lower-than-estimated net profit of Rs 19.75 billion in the June quarter. The bottom line was 27 per cent higher than in the year-ago quarter, while analysts had pegged a growth of over 40 per cent.
Lower net profit was largely due to a steep fall in other income, which was down 60 per cent to Rs 2.7 billion. Higher tax outgo at Rs 9 billion, up 26 per cent, also pegged the net profit performance back. Given the miss, the stock ended the day losing 3.7 per cent.
On the operating front, however, the company continues to outperform the sector posting strong volume growth. Aided by a 24 per cent growth in volumes, the firm posted revenues of Rs 218 billion which was 27 per cent more than the year ago quarter, marginally lower than estimates. Top line growth was both due to favourable product mix as the company sells more of the premium products such as the new Swift as well as the volume jump.
While companies in the auto space have taken price hikes, Maruti refrained from taking such a step in the June quarter. Moreover, its discounts on entry-level cars (mini segment) had to be increased to support sales in that segment (stagnant sales in the June quarter), even though some of its newer models such as Swift, Dzire, Baleno and Brezza (part of the compact segment) are on a waiting period. The average discounts in the quarter stood at Rs 15,161, up Rs 1,000 over the March quarter.
The company, however, is confident about growth going ahead given the uptick in the rural segment, which accounts for a third of the its sales. The management indicated that retail demand from rural markets was better than the urban markets and the trend was expected to continue on the back of higher minimum support prices and two consecutive near-normal monsoons.
Maruti Suzuki, which closed the 2017-18 financial year with a volume growth of 13 per cent, is expected to post a double digit growth in the current fiscal. The sector, according to the company, is expected to record an 8-9 per cent growth.
While growth is expected to be strong, the street will keep an eye on the margin pressures given the sequential rise in commodity costs. Raw material costs as a percentage of net sales increased by 130 basis points on a sequential basis and in the absence of any price hikes, costlier imports due to yen appreciation are capping the upside.
While the company posted a 59 per cent year-on-year growth in operating profit to Rs 26 billion, analysts had pegged the same at around Rs 33 billion. Margin gains of 250 basis points to 12.1 per cent were largely led by a favourable mix, operating leverage and cost-control measures. The gains on a sequential basis, however, were limited to 90 basis points due to raw material cost inflation.
While the company has not committed to any pricing action, it indicated that commodity costs, especially steel that had spiked in the June quarter, had stabilised and the pressure on raw materials should ease going ahead. How this plays out as well as its pricing strategy will decide its margin trajectory.