Beating sombre expectations of a year-on-year decline in profits, Maruti Suzuki managed to register a small increase in net profits in the fourth quarter of 2010-11.

The performance, partly aided by a change in treatment of certain raw material expenses, lower interest costs and tax rates seems to have contributed to the positive stock market reaction to the results.

Volumes, launches

The strong growth in volumes and better realisations from launches such as the SX4 Diesel and Kizashi (which reflected in a 20 per cent growth in net sales) supported profits.

Operating margins came in higher than anticipated, managing to touch the 10-per cent mark. Margins, in fact, expanded by 50 basis points (9.5 per cent in Q3) on a sequential basis. Coming at a time when input costs are squeezing profitability of automakers, this does come as a sweetener.

Depreciation boost

However, what has partly aided the margins is a change in depreciation policy. ‘Tooling', which was until now expensed under the raw material head, has been capitalised and amortised beginning this quarter.

Besides, a write-back of provisions for gratuity and leave encashment to the extent of Rs 20 crore has come to its rescue.

Apart from this, a forex gain of Rs 14 crore, accounted under the ‘other operating income' head has also played its part in easing the pressure on margins.

Other factors

Beyond the operating level too, factors have played out in the company's favour. One, a year-on-year reduction in interest costs from Rs 1,285 crore in Q4FY10 to Rs 635 crore currently.

Tax rates have come in lower at 21 per cent for the quarter, (as against the average of 26.5 per cent for the year) thanks to the benefit of deductions on research and development expenses.

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