The Hindu Business Line : Maruti: Pressure on margins may remain

The 20 per cent growth in net sales in the June quarter for Maruti Suzuki has been backed by a volume growth of about 12 per cent during the period, suggesting that the company has been able to push sales amidst rising interest rates. The bulk of the action on the volume front was witnessed in the A3 segment, which grew 44 per cent in the quarter, courtesy the newly-introduced Swift Dzire. The A2 segment too grew by 13.6 per cent, thanks to brisk sales of the Swift and the Wagon R. Exports grew by 38 per cent in the April-June period.

Rising input costs

However, this robust growth in sales has translated into a disappointing 7 per cent fall in net profits. This fall can be attributed to two factors. One, cost escalation and two, depreciation. A rise in the cost of inputs such as steel, aluminium and rubber, a rise in power costs due to a hike in diesel prices and increased spending on sales promotion (read: discounts) has taken a toll on the operating margins. From about 14.6 per cent in the same quarter last year, operating margins have dipped sharply to 9.7 per cent currently. Besides, the change in depreciation policy effected last quarter has resulted in the doubling of depreciation on a year-on-year basis.

Margin pressures to stay

Going forward, the pressure on margins is likely to remain, given the spiralling in raw material prices. During the quarter, Maruti hiked prices on its cars from Rs 1,000 to Rs 18,000 across all models, citing rising input costs. Improved realisations from cars such as Swift, SX4 and Dzire, ongoing localisation efforts for its diesel engine components, along with such periodic price increases, may help cushion the margins.

However, financing costs will remain a concern, on the demand front, reducing flexibility on pricing. Competition in the compact car segment is also heating up and with the expected launch of the Nano in October 2008 the company may be faced with increased sales and distribution costs.

Related Stories:
Maruti Q1 net skids despite higher sales
Maruti's Q4 profit skids on higher depreciation costs
Maruti Suzuki’s drive dented by higher costs

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