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After clocking double-digit volume growth (year-on-year) in the recent quarters despite challenges from demonetisation and GST implementation, Maruti Suzuki’s volumes witnessed a 1.5 per cent fall in the July-September 2018 period. Hence, expectations ran low for the second quarter earnings. In sync with what was anticipated, Maruti’s net sales grew by a marginal 0.5 per cent to ₹21,552 crore over the same quarter last year; net profit dropped almost 10 per cent to ₹2,240 crore.
Material costs shoot up
Apart from low volumes handing out less elbow room for growth on the operating front, higher raw material costs played spoilsport. A rise in commodity prices as well as the depreciation of the rupee (which made raw material imports costlier) impacted the operating margins. Material costs as a percentage of sales came in at 70.8 per cent during the quarter, up from 69.7 per cent a year ago. Both employee and other expenses shot up by 19 per cent each. While the company resorted to a price increase of up to ₹6,100 per vehicle in mid-August to partly pass on the cost increase, it did not help much. Operating margins stood at 15.3 per cent during the quarter compared with 16.9 per cent a year ago. Maruti did not get much support outside the operating level too. While tax expenses marginally dropped, other income remained flat and interest expenses rose.
Outlook
Rising fuel costs and interest rates as well as the expected rise in insurance costs from mandatory long-term insurance have impacted sentiment for the auto sector in recent months. Maruti is no exception. However, the festival season may give a lift to the December quarter volumes. For Maruti, premium cars such as the Baleno and Vitara Brezza continue to do well. While the Brezza still has a wait period of six months, the company has ramped up production of the Baleno to reduce the waiting time here. The new Dzire and the Ciaz have also been received well by the market.
On the operating front, the company has been making efforts to bring down its raw material import content. It stands at about 10-15 per cent currently. Further price hikes to pass on input cost escalations will also help margins.
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