Maruti Suzuki profit beats estimates, but analysts expected much better

Maruti Suzuki on Friday reported a 3.4% year-on-year increase in net profit to Rs 2,484.3 crore for the three months to September, beating Bloomberg consensus estimates. The bottom line was affected by a higher-than-expected tax outgo, up 26.51% on an annualised basis, and lower other income. Net revenues at the country’s biggest carmaker rose 21.8% year-on-year to Rs 21,768.2 crore, driven by a near-19% year-on-year jump in volumes and higher realisations of Rs 4.42 lakh per unit, up 3% year-on-year. However, analysts had expected a better show given an early festive season. The company hopes to produce 1.7 million passenger vehicles in 2017-18 compared with 1.5 million in 2016-17, the management indicated on Thursday. Chairman RC Bhargava said the 18% rise in volumes in Q2FY18 was satisfactory given that the goods and services tax had been rolled out on July 1. “We should continue to grow in double digits for the rest of the year,” Bhargava said at a press conference.

RS Kalsi, senior executive director, sales and marketing, said both wholesale and retail sales during the festive season across September and October had clocked double-digit growth. The Maruti stock hit an all-time high in intra-day trade, rising to Rs 8,242 before closing the session at Rs 8,114.80, up 0.47%. The stock has gained 52.5% in 2017 so far compared with a gain of 24.5% for the benchmark Sensex. Maruti’s strategy of building a portfolio skewed towards more premium products and offering customers premium servicing through special Nexa outlets is paying off handsomely. The Baleno, a compact hatchback, the Vitara Brezza, a compact SUV, and the new Dzire, a compact sedan, have all been winners and command long waiting periods. By 2020, the company hopes to have 300 Nexa workshops while the number of Nexa dealers is tipped to go up to 300 by March next year.

Operating profit margins for the carmaker in Q2FY18 fell 10 basis points year-on-year to 16.9% but expanded 360 basis points sequentially. While discounts offered during the quarter were smaller, other expenses increased by 11.8% year-on-year due to higher advertising costs. Chief financial officer Ajay Seth said that while raw material costs had softened compared with Q1FY18, when it was 71% of net sales, the cost of rubber and other materials had been rising. Consequently, Seth indicated there could be some stress on margins since the Gujarat plant has not fully ramped up. “Additionally, due to the lack vendors, we are bringing some material from the Manesar plant, which is adding to costs,” Seth said, though he ruled out an increase in car prices. The ratio of raw materials costs to sales in Q2FY18 went up by 110 basis points to 69.7%.

The rise in operating profit or earnings before interest, tax, depreciation and amortisation was 21.1% year-on-year to Rs 3,677.5 crore. Seth told analysts on a post-earnings conference call that the capacity utilisation in Gujarat was 10,500 units per month but would expand to 20,000 units by Q4FY18. “We are hoping to stretch our volumes to1.7 million units this year,” he said. GST, he said, had discouraged the purchase of hybrid vehicles. “Earlier about 70% of the total sales of Ciaz came from the hybrid variant but post-GST, it has come down to just 32%. Also, sales of the hybrid variant of Ertiga are down to 50% from 70% of overall Ertiga sales earlier,” Seth pointed out. The company has already ramped up its production capacity at a more than expected rate in the Gujarat plant, which will further boost volumes of the Baleno.