Weak demand too to blame for Maruti's Q2 skid

A 15.6 per cent fall in Maruti Suzuki's sales was not only due to production losses from the labour strike.

Digging deeper into the numbers shows that weak demand was at play as well. Even leaving the 28,500 units of production out of the picture, sales volumes during the September quarter of FY12 have still shrunk by 10 per cent compared to the second quarter of last year, indicating the general weakness in the markets.

Sizeable discounts, which were netted off from sales also curtailed top line growth. From an average of about Rs 9500 per vehicle in the June quarter, discounts in September quarter increased to Rs 13,500 per vehicle.

Curtailed production saw consumption of raw material decrease by about 18 per cent. Cost pressures seem to have eased off a bit too as raw material costs as a percentage of sales too came down from 77.6 per cent last year to about 75 per cent this quarter. But a hit to operating profits from a few other factors has triggered the 60 per cent fall in net profits.

Rupee-yen factor

First is the adverse impact of the appreciation of the yen against the rupee. This has added about Rs 100 crore in the form of mark-to-market losses on the provision for royalty for the April-September period, which will be paid out in November. A lower Rs 27 crore has also been lost due to yen appreciation on the import of inputs.

Besides, stock-in-trade has shown a decrease of Rs 95 crore as against an increase of Rs 148 crore shown in the second quarter of last year. These, predominantly have pushed down the operating margins to 6.3 per cent now from about 10.5 per cent last year.

Diesel drive

Going forward, a resumption of normal production and more favourable yen-rupee rates may bring stability to the company's financials. That said, volume growth may still be challenging as one, the mini and compact segments, which are the company's strong hold, is witnessing stiff competition from launches such as the Liva, the Eon and the Brio; two, the very same segments have shown about 4-5 per cent year-on-year shrinkage in volumes in the first six months.

However, what might better Q3 sales is the strong demand for diesel vehicles (21 per cent of sales). Commencement of production at the second plant at Manesar too would improve availability of the Swift and Dzire and help cut down on the current five month waiting period.

Wait and watch

At the operational level, although more diesel vehicle sales will give realisations a leg up, high discounts on petrol products may partly offset this. Secondly, as against the general industry expectation of lower input costs for the second half, Maruti has indicated no major savings on raw material costs in Q3 and Q4.

The indirect exposure to a strengthened yen during Q2 through import content of vendors (about 14 per cent of net sales) is also expected to impact profits the next quarter as payments are made with a lag.

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