Maruti Profit Declines as Import Costs Rise, Rupee Falls

By Siddharth Philip - Jul 28, 2012

Maruti Suzuki India Ltd. (MSIL), India’s biggest carmaker by volume, said first-quarter profit declined 23 percent as a weaker rupee pushed up import costs.
Net income at Suzuki Motor Corp. (7269)’s Indian unit fell to 4.24 billion rupees ($77 million) in the three months ended June 30, from 5.49 billion rupees a year earlier, the New Delhi-based company said yesterday. That missed the 4.9 billion-rupee median of 26 analysts’ estimates compiled by Bloomberg.
The earnings underscore the challenges Chief Executive Officer Shinzo Nakanishi faces after the automaker’s most violent labor dispute this month led to a manager’s death and prompted it to stop production at one of its factories. The company, which makes about 40 percent of the cars sold in the country, may risk losing its market share should the stoppage continue for a month, said Umesh Karne, an analyst with BRICS Securities Ltd. in Mumbai.
“Maruti can’t afford to keep the plant closed,” Karne said in a telephone interview. “Customers may not be willing to wait,” with rivals including Hyundai Motor Co. and Tata Motors Ltd. (TTMT) offering vehicles at competitive prices, he said.
A general manager was killed and dozens of executives injured on July 18 at Maruti’s plant in Manesar, in northern Haryana state. Chairman R.C. Bhargava on July 21 announced a lockout and ruled out an early resumption of the factory.

Labor Dispute

The current stoppage is the carmaker’s fourth in the past year at the factory. The dispute began after a worker beat up a supervisor on the shop floor. The union then prevented the management from taking disciplinary action, blocking managers from leaving the factory after work, Maruti Suzuki has said.
Maruti rose 0.4 percent to 1,112.95 rupees in Mumbai on July 27. The stock has declined 9.3 percent since the riot, compared with the benchmark Sensitive Index (SENSEX)’s 2 percent drop.
The automaker, 54 percent owned by Suzuki, sold 295,896 vehicles in the quarter, Maruti said. Sales of the DZire sedan surged 87 percent, while that of Swift, Estilo and Ritz hatchbacks rose a combined 31 percent. Sales of the SX4 sedan declined 74 percent in the quarter, according to a company statement on July 2. Exports rose 6 percent to 32,632 units.
Sales increased 27 percent to 105 billion rupees from 82.6 billion rupees a year earlier, Maruti said. The median of 40 analysts’ estimates compiled by Bloomberg was for revenue of 99.4 billion rupees.
Raw material costs increased 26 percent to 80.6 billion rupees, the company said in an e-mailed statement.

Costs Double

Maruti’s costs for importing components has more than doubled in the past few years because of the weakening of the rupee, Chief Financial Officer Ajay Seth said in an interview earlier this month. Exports contribute 8 percent of total sales, while it spends about 21 percent on importing components such as electronics and diesel engine parts, he had said.
“The currency hit Maruti, both on imports as well as royalty payments to Suzuki,” said Karne at BRICS Securities. “With the current economic scenario, we will have to see where the rupee goes.”
The rupee weakened about 20 percent against the dollar and the yen in the 12 months ended June 30. In the quarter to June 30, the local currency slumped 12 percent against the yen and 8.6 percent versus the greenback.
“Adverse currency movements, notably the yen-rupee exchange rate, impacted profit negatively,” according to the company’s statement.

Slowing Growth

India’s economic growth slowed to the weakest in almost a decade in the quarter that ended in March and the rupee slumped to a record low amid a paralysis in policy making that has hurt efforts to spur investment as a global recovery falters.
Maruti’s sales in the nine-month period ended Dec. 31 declined 17 percent because a labor dispute at its Manesar factory resulted in an output loss.
The recent lockout comes amid a slowdown in car sales in India as high gasoline prices and interest rates deter buyers. The Society of Indian Automobile Manufacturers on July 10 cut its forecast for growth to a range of 9 percent to 11 percent for the year ending March 31 from an estimate of 10 percent to 12 percent given in April.
Should the plant, which accounts for about 35 percent of the company’s total output, stay shut for two months, it will hurt Maruti’s revenue and profit, R. Murali Krishnan and Mitul Shah, analysts at Karvy Stock Broking Ltd. in Mumbai, wrote in a note on July 25.
“We see the current event at Maruti’s Manesar plant as a structural impact on its business, as it is more related to humanitarian and psychological aspects beyond the financial implications,” wrote Krishnan and Shah, who rate the stock underperform. “We don’t see light at the end of the tunnel, at least for the time being.”
To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net
To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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