Revenue from operations fell 12.19% y-o-y to Rs 19,719.8 crore, though realisations were better.
An 18% drop in volumes and higher expenses dragged down Maruti Suzuki’s Q1FY20 net profit by 27.32% year-on-year (y-o-y) to Rs 1,435.5 crore, the fourth straight quarterly fall. Even a three-fold jump in other income to Rs 836.4 crore and a 48% y-o-y decline in tax expenses couldn’t boost the bottomline at India’s biggest car maker. The profits, however, beat the Bloomberg consensus estimates of Rs 1,338.91 crore. Management commentary was circumspect. Ajay Seth, CFO, Maruti Suzuki, said the uncertain demand environment was making it difficult to predict growth. “Unless there is a government intervention which may give some relief, it would not be fair to assume any growth numbers,” Seth said on the post earnings call. “Inventory continues to be higher than normal at Maruti outlets,” he told analysts.
Revenue from operations fell 12.19% y-o-y to Rs 19,719.8 crore, though realisations were better. Operating profit margins contracted a huge 440 basis point to 10.4%, hit by higher raw material prices and average discounts, used to boost sales in an otherwise subdued market.
Consequently, Maruti’s Ebitda (earnings before interest, taxes, depreciation and amortisation) dropped by a massive 38.5% y-o-y to Rs 2,048 crore in Q1FY20. Raw material costs as a share of net sales rose 410 bps; the average discount during the quarter was Rs 16,941, higher by 12% on a sequential basis. The Maruti stock nonetheless ended 0.78% higher on Friday at Rs 5,805.55 on the BSE.
The management attributed the weaker demand to tightening credit and the increase in prices due to the safety norms. Seth said the industry was witnessing a downcycle and that lower sales comined with higher depreciation had impacted profits. “Retail sales are also under pressure and were down 17% y-o-y in Q1FY20.”
Higher depreciation expenses, lower capacity utilisation, adverse commodity prices and higher sales promotion expenses dented margins. Depreciation and ammortisation expenses during the quarter went up by 27.61% y-o-y.
Last month, RC Bhargava, chairman of Maruti Suzuki, had said loans have become more expensive since the second half of previous fiscal due to higher interest rates, which might continue impacting consumers for the next few months. “The bottom has already been reached and the upturn is beginning. But we need to wait for another 2-3 months to say this with greater confidence,” Bhargava had said.
Discounts were higher as dealers were saddled with huge inventories, piling up since the festive season last October. Demand since then has been way lower-than-expected partly because car prices have risen on the back of a hike in the insurance premium and costlier finance. Maruti’s wholesale volumes during the quarter were 402,594 units, down by 18% y-o-y, as the company resorted to production cuts and plant shutdowns to control high inventory piled up at the dealers. Models like the Alto, Swift and Baleno decline for almost the 10th consecutive month till June 2019.
Bhargava had earlier said he expects the inventory to ease in the next few months. “With the RBI easing interest rates, I hope the banks will pass on the benefits to customers in the next few months, which may help in inventory easing out,” Bhargava had said.
Analysts, however, see no green shoots in the near termg given that retail demand continues to be weak which will affect wholesales. “We think the recovery is likely to be slower than our initial expectations. Our industry checks indicate that retails have also declined and inventory levels might remain elevated (5-6 weeks),” analysts at Nomura said early this month.
Average realisation in the April-June quarter improved by over 7% y-o-y to Rs 4.92 lakh due to price hikes taken on account of features added to comply with the safety norms from April 1, 2019. Maruti also rolled out a few BS-VI versions of its model, resulting in price increases. Realisation was Rs 4.6 lakh in Q4FY19 and Rs 4.59 lakh in Q3FY19.