Given that automobile sales have been nothing to write home about, Maruti Suzuki’s 39.3 per cent fall in profits to Rs 1358 crore in the quarter ended September 2019 (over the September 2018 quarter) does not come as a surprise. In fact, the fall in profits could have been worse, if not for the 78 per cent drop in tax expenses to Rs 213 crore. The company has been a beneficiary of reduction in corporate tax rate announced by the government. In 2018-19, the company’s effective tax rate stood at 29 per cent, higher than the new rate of 25.7 per cent. Profits were also helped by 75 per cent rise in ‘other income’ to Rs 920 crore and a drop in ‘other expenses’ by 15 per cent. Though sales promotion expenses were high thanks to the ongoing discounts, cost control efforts helped.

Realisations improve, but margins hit

Despite a 30 per cent fall in volumes, improvement in average realisation per vehicle from Rs 4.44 lakh a year to Rs 4.76 lakh helped arrest the decline in net sales to a lower 25.2 per cent. Net sales came in at Rs 16120 crore. Lack of operating leverage due to poor volumes impacted profitability at the operating level sharply. Raw material cost as a percentage of sales too inched up to 74.7 per cent from 70.8 per cent a year ago. Thus, operating margins for the company contracted by 5.8 percentage points to just 9.4 per cent.

Outlook

Given the ongoing discounts to push up sales and lower interest costs, the festival month of October could see new vehicle sales picking up a bit. But uncertainties surrounding the BS VI transition and higher transactions costs still remain a dampener for vehicle sales until the end of this fiscal. The stock has moved up by 28 per cent in the last three months and is now trading at a fairly rich valuation of 32 times its trailing 12-month earnings. Hence, the near term upside will be limited.

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