Beating market estimates of around Rs 433 crore, Maruti Suzuki's net profits came in Rs 550 crore for first quarter of 2011-12, showing an 18 per cent growth over last year.

This performance has come despite net sales growth of only 3.3 per cent due to production losses and sluggish volume growth. An 80 per cent growth in other income to Rs 180 crore (attributable to capital gains), stable margins at 9.8 per cent from cost control efforts, a 28 per cent fall in interest expenses and flat depreciation charges for the quarter aided profit growth.

Slowdown worry

The challenge of combating a slowdown in domestic auto sales remains. Already, volume growth in cars was only at 8.7 per cent in the first quarter, compared to the auto industry growth of 15 per cent. Moreover, within the passenger car segment, it is the compact segment has shown greater impact from a slowdown, with volumes declining by about 2.25 per cent. Maruti's exports too have suffered since the withdrawal of the scrappage incentives in Europe, with export volumes down by 24 per cent this quarter.

Although raw material costs are expected to remain stable, what could exert downward pressure on the operating margins is one, the discounts, which the management has indicated are likely to go up. Two, the indirect exposure to a strengthening yen through import content of vendors (about 15 per cent of net sales), which remains unhedged.

Diesel factor

Given the slackening demand, the company does not contemplate any price increases in the near future. However, what could push up realisations a bit is the increasing proportion of diesel vehicles (available in SX4, Swift, Dzire, Ritz models) in the sales mix. In the first quarter, diesel vehicles constituted 21 per cent of the total vehicles sold.

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