Saturday, October 30, 2010

Higher royalties, input costs tell on Maruti Suzuki\'s Q2 profit

New Delhi, Oct. 30

Increased royalty payments, rising input costs and exchange rate fluctuations have resulted in Maruti Suzuki India Ltd (MSIL) posting a modest 5 per cent growth in profit for the quarter ending September 30.

However, driven by booming demand, net sales rose 27 per cent, even as the car market leader recorded the highest-ever unit sales for a quarter at 3.13 lakh.

Q2 margin pressures

The company, majority owned by Japan\'s Suzuki Motor Corporation (SMC), anticipates margin pressures in the second half, which it would look to reduce by controlling production costs and increasing the localisation content of its products.

Mr Shinzo Nakanishi, Managing Director and CEO, MSIL, said, "Driven by good consumer demand, we have had the strongest ever sales for a quarter, breaking the record set by the first quarter of the fiscal. There were some challenges, but we expect the demand momentum to continue with the base effect in mind."

On the four per cent drop in exports in the quarter to 35,718 units, he said, "European demand has dipped, but we have been able to increase the share of non-European markets to 60 per cent of exports from 20 per cent last year. We will try to meet last year\'s overall volumes, but will have to watch out for appreciation of the Japanese Yen, to which we have both direct and indirect exposure."


Mr Ajay Seth, CFO, MSIL, said the royalty paid to SMC in the second quarter has gone up 83 per cent to Rs 471.6 crore (at 5.3 per cent of net sales). In the corresponding period last year, it paid Rs 257.9 crore at 3.7 per cent of net sales. For the first half of 2010-11, it paid Rs 949.6 crore, up from Rs 483.9 crore last year.

"The royalties went up due to a recent revision in the rates and because of a change in our product mix, where we are using more new Suzuki technology like the K-series engines. We have more or less hedged ourselves against the Yen appreciation versus the rupee, but the euro has depreciated by 100 basis points since the same quarter last year. There was also 0.5 per cent impact of raw material cost increases — steel prices rose 10 per cent over the first quarter," he said.

Stiff competition

Even as most costs have gone up with the sales, the stiff competition in the car market has prevented Maruti Suzuki from increasing prices, leading to a hard impact on the bottom line.

The company, which has now got the board approval for a third production line at Manesar at an investment of Rs 1,925 crore, hopes to increase production by 10 per cent this year. This is apart from the Rs 1,700 crore it is investing to expand the Manesar facility. At present, it has capacity to make 12 lakh units a year, but given high demand for its vehicles, it hopes to make more than 13 lakh units this year through efficient manufacturing practices. But by 2012-13, it targets a 17.5 lakh unit capacity across its facilities at Gurgaon and Manesar.

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