Maruti Suzuki’s Q4 net profit falls, but new car models drive up sales

New Delhi: Maruti Suzuki India Ltd on Tuesday said net profit fell 11.73% in January-March quarter, due to higher tax outgo and production loss from unrest near its factory. The profit drop was the steepest in two years.

Net profit for the three months ended 31 March fell toRs.1,133.60 crore, compared to Rs.1,284.20 crore a year ago. Net sales rose 12.48% to Rs.14,929.50 crore from Rs.13,272.50 crore a year ago.

A Bloomberg poll of 27 brokerages had estimated net sales of Rs.14,883.60 crore and a net profit of Rs.1,188.10 crore.

In a phone interview, Ajay Seth, chief financial officer at the firm, said Maruti Suzuki paid tax at a higher rate of 33% owing to fewer benefits on research and development (R&D), smaller tax-free income and lower capital expenditure compared to the year-ago period.

“It is a one-time phenomenon and will get reversed the next year,” said Seth, adding as the company switches to the IFRS accounting norms in the current fiscal, it will be required to report tax rate every quarter.

Higher capital expenditure of Rs.4,400 crore for fiscal 2016-17 will bring down the effective tax rate to 25-26%, said Seth. He said 40% of this will be utilized for new product development.

Despite the fall in profit, analysts saw the earnings as positive. “Maruti’s operational numbers are above estimates. Gross margins expanded by 250 basis points (bps) to 34% which led to Ebitda margins at 15.4% as against estimates of 14.8%,” said Mihir Jhaveri, director of institutional research at Religare Capital Markets Ltd, said in a note after the earnings.

One bps is one-hundredth of a percentage point.

Margins were bumped up by new models including the Vitara Brezza compact sports utility vehicle (SUV) and Baleno hatchback which command a higher selling price.

Margins were also boosted by a reduction in discounts by an average Rs.4,000 per unit.

The company gave a discount of Rs.17,577 per car in the March quarter compared with Rs.21,997 in previous quarter, Seth said.

Maruti ended fiscal 2016 with record sales of 1,429,248 units— an increase of 10.6% from a year ago. Its domestic sales stood at 1,305,351 units, another record.

“Surprisingly, they have lowered discounts at a time when competition in the volume car market has intensified, and events like the diesel car ban and the odd-even scheme are mounting pressure on the auto firms,” said Mahantesh Sabarad, deputy head of research at brokerage SBI Cap Securities Ltd.

Lower discounts reflect an improvement in sales efficiency.

Sabarad said he expects the margin to sustain in the forthcoming quarters as the company continues to benefit from a robust volume run from its new models and improved efficiency across its sales channels.

Meanwhile, Maruti Suzuki is speeding up the production of Brezza and Baleno which currently have long waiting periods, Maruti’s Seth said in an earnings call with the analysts.

In response to a question on capacity constraints facing the company, Seth said that Maruti produced 1.43 million units in 2015-16 and is planning to raise capacity to 1.57 million units in the current fiscal year.

This, he added, will be done by introducing additional shifts and setting up temporary lines as the plants are already running at optimal capacity. The company’s Gujarat plant, which is part of a contract manufacturing agreement with parent Suzuki Motor Corp., will open in January 2017, according to a plan outlined earlier.

Rural sales accounted for 35% of total volumes in 2015-16, R.S. Kalsi, executive director of sales and marketing, said in the earnings call. It has advanced 9% as against 22% the year before. Kalsi expects a favourable monsoon to help in reviving rural demand, but the impact may not be seen before October.

Maruti Suzuki expects double-digit growth in sales in the year started April, said R.C. Bhargava, chairman at the firm, at a press conference in Delhi on Tuesday.

On Tuesday, Maruti Suzuki’s shares rose 3.62% to close atRs.3,869.45 on BSE. Benchmark index Sensex gained 1.28% to close at 26,007.30 points. The BSE Auto Index gained 1.57% to close at 18,827.41 points.