Maruti Suzuki’s net profit disappoints street

India’s largest car maker Maruti Suzuki India Ltd reported a 10% increase in net profit for the fourth quarter of fiscal 2017-18 at Rs 1,882 crore as compared to Rs 1,710 crore in the same quarter last year.

The rise in net profit was below analysts’ expectations, who estimated the company’s fourth quarter net profit to be in excess of Rs 2,000 crore. As a result, despite increase in net profit, the company’s shares fell sharply after the announcement of its financial results and closed at 1.9% lower on the Bombay Stock Exchange at Rs 8,777.95 on Friday.

For the fourth quarter, Maruti Suzuki’s net sales grew 14.4% to Rs 20,594 crore as compared to Rs 20,423 crore in the same quarter last year. The company sold a total of 461,773 vehicles during the quarter, a growth of 11.4% over the same period of the previous year.

The company said in a statement that the net profit was impacted due to an increase in the effective tax rate. Elaborating on the factors that impacted the net profit, the company’s chairman R C Bhargava said, “Compared to last year, the effective tax rates have gone up by about 3%. Instead of 26% last year, we now pay 29%. There were also some unforeseen one-off items that impacted the profit and loss account this year. We have had an adverse impact of mark-to-market items. Significantly, commodity costs like steel and aluminium has gone up by about Rs 700 crore this year.”

The net profit was also impacted to the tune of roughly Rs 250 crore due to payments for dues raised by the Haryana State Industrial & Infrastructure Development Corporation for enhanced compensation to the landowners of Maruti’s freehold land at Manesar, Haryana. The dispute dated back to 2012 and the company has recognised Rs 250 crore in the fourth quarter’s profit and loss account.

During the quarter, the strengthening of the yen also meant Maruti Suzuki’s royalty payout to Suzuki Motor Corporation increased marginally. “However, for the full year, royalty payments have come down to 5.4% from 5.8% in the previous year,” said Bhargava. The royalty is a percentage of the net sales that Maruti Suzuki pays to its parent for using the Suzuki badge.

He added that in future years royalty payments will be on a downward trajectory as Suzuki Motor Corporation and Maruti Suzuki India Ltd have agreed on a new royalty formula which will be based on the rupee. The new formula which will let Maruti Suzuki be reimbursed for product development, will be applied to the Ignis, the Swift and the Dzire car models in the current year. “Expectation is that by 2021, all the cars in the Maruti Suzuki stable will come under the new royalty formula,” said Bhargava.

Under the new formula, the royalty has been capped at 5% of net sales of the company in rupee terms. Bhargava said that by 2021 the royalty will definitely be below 5% but said that at this stage it would not be possible to predict how much lower it would be.

To mark the 35th anniversary of its association with Suzuki, Maruti Suzuki India Ltd will also start two new funds. The first is an employee welfare fund which would receive 1% of the previous year’s net profit ever year for matters relating to education, health and infrastructure in housing colonies of Maruti’s employees. The second is a fund for promotion of research and scientific work in the country. This would also receive 1% of the company’s net profits ever year. More details of the two funds will be drawn up in the coming weeks, said Bhargava.

For the full year, Maruti Suzuki’s net profit increased 5.1% to Rs 7,721 crore while net sales increased 16.7% to Rs 78,104 crore. The company sold 1.77 million vehicles during the 2017-18 fiscal, a growth of 13.4%. This helped the company’s market share cross 50%.

Bhargava said that sales volumes are expected to increase at 10% for the 2018-19 fiscal as well and anything more than that would depend on the production department’s ability to deal with production constraints.

“With sales of nearly 1.8 million, a 10% growth means 180,000 cars. We are making temporary arrangements in Haryana to increase capacity because we will only get the benefit of the second plant of Suzuki by January 2019. So how much beyond 10% we go will depend on the ability of the production department to ramp up capacity,” said Bhargava.