News Analysis

Maruti Q4: Margin pressure may continue amid uncertainty on fresh demand

Parvatha Vardhini C BL Research Bureau | Updated on April 28, 2021

Maruti Suzuki   -  Twitter via @Maruti_Corp

Limited price increase amid steep rise in prices of commodities impacted operating profits and margins

A 28 per cent jump in volumes partly aided by the lower base of last year, helped Maruti Suzuki record a 33.6 per cent growth (year-on-year) in revenues to ₹22,958 crore in the quarter ended March 31. But, this healthy growth did not carry through to the bottomline, with profits dropping by 9.7 per cent to ₹1,166 crore.

A steep rise in prices of commodities such as steel, rhodium and palladium (used in BS-VI engines) and the company’s limited price increase of under 1 per cent during the quarter impacted operating profits and margins.

Material cost as a percentage of sales moved up to 79 per cent in the quarter vs. 76 per cent a year ago. Operating margins came in at just 8.3 per cent vs. 12.8 per cent a year ago. Amid the resurgence of Covid, the good news is that the company has an order book of about 2 lakh vehicles and that it has not yet seen any dip in fresh bookings. But it may still be early days. As many as 9 States which contribute 35 per cent to Maruti’s sales are in some form of lockdown currently, according to the company.

What can support Maruti is that non-urban sales for FY21 constituted 41 per cent of the total sales, up by 2.5 percentage points over FY20. Forecast of normal monsoons bode well for rural demand. Secondly, first time buyers constitute 46.9 per cent of the company’s customer base and the need for personal mobility in Covid times, could also bring in more volumes.

Rise in commodity prices

However, challenges may continue on the margin front. The steady rise in commodity prices in the last year has seen Maruti’s operating margins come down sequentially by more than a 100 basis points, from the 10.3 percent and 9.5 per cent clocked in the second and third quarters respectively. To ease up some of the margin pressure, company has taken an average price increase of 1.25 per cent in April. Any dip in volumes could reduce the operating leverage for the company and further pull down profitability.

Secondly, margins have also been partially impacted by a poorer product mix. Maruti has seen a steady dip in market share in the utility vehicle segment — from 28 per cent in 2018-19 to 21.6 per cent in 2020-21. Stiff competition from new entrants Kia, MG Motors as well as launches such as the Nexon and Urban Cruiser have impacted its UV market share. While the company did launch a refresh of the S-Cross in the mid-size UV space last year, it hasn’t taken off as expected. Hence, launches could hold the key to better volumes and margins.

Published on April 27, 2021

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