Maruti Q3 net up 27% at Rs 1,019 cr

Riding on a 15 per cent growth in sales volume, Maruti Suzuki, the country’s largest carmaker has reported a 27 per cent year-on-year (y-o-y) jump in net profit for the quarter ended December 2015 (Q3 FY16). Profit for the quarter stood at Rs 1,019 crore against Rs 802 crore in the corresponding quarter of previous year. Net sales for the quarter rose Rs 14,768 crore, up over 20 per cent y-o-y. The company, which enjoys over a 47 per cent share in the domestic passenger vehicle market, sold 374,182 units in the Q3 FY16.

“Higher volumes, material cost reduction initiatives and favourable foreign exchange contributed to profit during the quarter,” the company stated.

Nevertheless, the aggressive launch initiatives appear to have dented its profits to some extent. Overall, December 2015 quarter was a mixed bag as despite revenues being in line with analyst expectations, profits were much below Bloomberg estimates of Rs 1,343 crore.

On the whole, the Street is unlikely to take this positively as when seen against Q2 FY16 performance, profits are down nearly 17 per cent sequentially despite the December 2015 quarter witnessing the festival season.

Operating profit margin of 14.7 per cent in Q3 FY16 (versus 13.2 per cent in Q3 FY15), was lower compared to 16.7 per cent in Q2 FY16. The company’s scrip on BSE closed 0.4 per cent lower at Rs 4,093.55 on Thursday. Since the results came post market closing, its stock price could see some pressure on Friday as well for not keeping up with its profit estimates and for certain cost pressures likely to persist.

Slippage in profit growth may be attributed to higher raw material cost (up 10 per cent YoY); much in contrast to analyst expectations as cost of key raw materials such as steel and aluminium have corrected by 25 to 30 per cent YoY. The management in its con-call attributed higher raw material cost to launch of new products such as Baleno and S-Cross, where import component stands at round 22 per cent. This cost pressure may stay in the near-term. Benefit from decline in commodity prices was partially offset by higher discounts during Q3 FY16.

Maruti Q3 net up 27% at Rs 1,019 cr Likewise, other expenses (mainly sales and marketing expenses) too shot up by nearly 17 per cent YoY. With the management’s willingness to invest in promotional and marketing activities for long-term benefits, analysts feel that sales and marketing expenses may remain at elevated levels given that the company is planning for at least three launches in 2016. Depletion in factory level inventory also lead to higher operating expenses in Q3 FY16. Part of the expenses can also be attributed to the launch and expansion of Nexa showrooms, something that will continue in the foreseeable future.

“If we had an inventory level similar to end of Q2, the material cost would have been lower by Rs 100 crore,” said Ajay Seth, executive director and chief financial officer, Maruti. Seth explained that the company usually carries finished stock of 25,000 units at the end of a quarter but it came down to just 4,000 units at end of December as it pushed sales of 2015 stocks. That apart, it gave an average discount of Rs 22,000 on vehicles in Q3 against discount of Rs 19,579 in Q2. “The company does not anticipate any further softening in commodity prices. During Q3, the company’s employee benefit expenses went up by 34 per cent to Rs 504 crore due to a provision for bonus with retrospective effect (April 2014 onwards),” he added.

However, Arun Agarwal of Kotak Securities feels that with these one-off costs unlikely to recur, operating margins may improve in Q4 FY16. The company’s net profit for nine month ended December 31 stood at Rs 3,437 crore, up 41.6 per cent from corresponding period of previous year. Sales revenue in the nine month period went up by 17 per cent to Rs 41,421 crore. The car maker sold 1.068 million units of vehicles in the nine-month period, up 13 per cent.