Slowing sales put a big dent in Maruti’s Q1 net profit

Maruti Suzuki shares were up 2% in afternoon trade (Ramesh Pathania/Mint)

Maruti Suzuki India Ltd, the country’s largest passenger vehicle manufacturer, on Friday reported its sharpest fall in net profit since the fourth quarter of FY14—a fresh sign of a general slowdown in the auto market.

It also reported significant contraction in operating margin owing to a double-digit decline in vehicle sales and higher depreciation and amortization cost.

The company sold 402,594 units in the April-June quarter, down 17.9% from the year-ago period. The overall slowdown in the economy and lack of credit availability from financial institutions in the aftermath of the liquidity crisis triggered by the IL&FS default contributed to the fall in sales.

Net profit fell 27.3% year-on-year to 1,435.5 crore during the quarter, as overall passenger vehicle sales in India struggled with its steepest fall in two decades. In April-June 2018, it had reported net profit of 1,975.3 crore.

The company’s net sales during the period fell 14.1% to18,735.2 crore from 21,810.7 crore a year ago.

Maruti, however, managed to beat Bloomberg’s net profit and revenue estimates of 1,338.9 crore and 19,069.2 crore, respectively. This was primarily due to an increase in other income and a fall in other expenses.

The carmaker’s total revenue from operations fell to 19,732.6 crore from 22,470.8 crore in the corresponding period last year.

The company witnessed a sharp rise in expenses due to rising raw material prices, and depreciation and amortization costs. Raw material expenses rose by 410 basis points (bps) to 75.1% of net sales, while depreciation and amortization costs increased 160bps to 4.9% of revenue. Employee costs increased by 110bps.

As a result of higher costs and the slowdown in sales, operating profit, or earnings before interest, taxes, depreciation and amortization, fell sharply by 38.8% year-on-year to 2,047.6 crore.

The operating margin in the quarter contracted by 455bps to 10.92% from 15.36% in the corresponding three-month period of fiscal 2018-19.

Other income during the quarter increased by a whopping 179.9% to 763.3 crore, which helped the company arrest the decline in profit. Cost-cutting initiatives and lower royalty payment to its parent Suzuki Motor Co., owing to lower sales, helped decrease other expenses by 4% to 2,740.4 crore.

According to Ajay Seth, chief financial officer, Maruti Suzuki India, though retail sales were under pressure, the company successfully managed to keep operating expenses in control due to cost cuts, including a curb on advertising spends.

“There is some significant uncertainty in the market and, if we see some policy intervention, then there are chances of some recovery in demand,” added Seth in a conference call with analysts.

“Maruti’s strong product pipeline, success of new launches, leadership and strong management capability would benefit the company’s profitability going forward, while post clarity from management, we may revisit our estimates and view on the stock,” said Mitul Shah, research analyst, Reliance Securities.

“We seek clarity from the management on the cost structure and cost escalation pass on to customers, as margin continued at this 10% range. However, we expect increase in first time buyers from rural markets and volume improvement on the back of success of new BS-VI launches,” added Shah.

Maruti Suzuki shares ended the day at 5,805.55 apiece, an increase of 0.78% on the BSE on a day when the benchmark Sensex gained 0.14%.