Maruti Q2 net falls 37%, the lowest in 3 yrs

Posting its lowest profit since September 2005, Maruti Suzuki, the country’s largest automobile company, posted a 37 per cent decline in its net profit for the quarter ended September 2008. The profit fell to Rs 296.1 crore for the second quarter this year as against Rs 466 crore in the year-ago period.With the domestic demand turning sluggish, the company is counting on rural sales and export markets to sustain its profits. “We are seeing strong growth coming from the tier-III cities,” said Shinzo Nakanishi, CEO and MD, Maruti Suzuki. Currently, markets in rural India contribute about 5 per cent to the company’s overall sales.

“With interest in small cars growing the world over, we expect the A Star to have a significant demand in Europe. In styling, CO2 emissions and fuel-efficiency, the A Star will have a greater demand in these markets.” Nakanishi added. The company also said the commencement of Nissan’s production next year would help it sustain sales.Maruti’s sales for the second quarter of 2008-09 rose by 6 per cent to Rs 4,806 crore against Rs 4,529 crore last year. The operating margin dropped to 7 per cent in the quarter under review compared with 13.76 per cent in the same period last year.

Analysts said the net profit has been in line with expectations.The drop in net profit comes on the back of a depreciation policy that took effect in the March quarter of 2008. “Depreciation takes effect on models that are four years old,” said Ajay Seth, CFO, Maruti Suzuki. The slide in the net profit also comes on the company’s forex losses. “Till the quarter ended September, we had a mark-to-market loss of Rs 50 crore on our external commercial borrowing (ECB).

We also had a loss of Rs 18 crore on foreign currency fluctuations,” said Ajay Seth. The company, which imports about 50 per cent of its steel from South Korea and Japan, witnessed higher raw material costs shaving off about 1 per cent of its operating profit margin in the second quarter.Discounting on select models has also increased sales and marketing expenses to about 7 per cent in this quarter.While depressed market conditions are expected to continue for the third quarter of 2008-09, the company has projected better profits for the financial year 2009-2010.

“While we remain a net importer for 2008, in the next year, we would be able to improve margins as a result of exports to newer markets like Europe, which will help us become a net exporter,” said Ajay Seth.The company is also counting on the renewed domestic demand during the festival season and from the launch of models like the A Star.Despite a slugging market environment, the company said its expenditure on R&D facilities and factory upgrade would continue. It has invested Rs 1,200 crore in its newly-opened KB-series engine plant in Gurgaon and plans to raise the headcount of its R&D team to about 1,000 by 2010. The company’s Mundhra terminal in Gujarat, which will be used to export the A Star, will be commissioned in January 2009.

Source: BS

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