BL Research Bureau A large part of the sharp 34 per cent fall in Maruti’s net profit in the fourth quarter can be attributed to the steep rise in depreciation charge due to a change in policy. But blame has also to be shared by the considerably higher expense on raw material and power, which hit operating margins in a significant manner.

Operating profits, which is profit before depreciation and interest charges, fell 17 per cent to Rs 456 crore compared with the same quarter last year. A 9 per cent increase in raw material costs such as steel and components, increased power and fuel costs at the Manesar plant, which is being run on diesel (diesel costs are roughly 3.5 times more than gas), and higher royalty payment for new launches, have all dented margins. Operating margins stood at a thin 9.6 per cent vis-À-vis 13 per cent during the same period last year.

In addition, Maruti also had to provide for a marked-to-market (MTM) loss of Rs 50 crore. Out of this, Rs 29 crore has been incurred on forward euro contracts on exports and the remaining on an external commercial borrowing (ECB), which was later swapped with a rupee loan. As per the accounting standard on derivatives accounting, this swap is required to be reinstituted to the original currency and the loss marked; it would consequently be reversed when the rupee loan is repaid.
Rule change

Maruti also had to provide a significantly higher depreciation charge than normal following a change it made in the useful life of plant and machinery, and dyes and digs with effect from April 1, 2007 (to factor in shorter product life-cycles). Thanks to this, depreciation rose from Rs 71 crore in fourth quarter last year to Rs 311 crore in this quarter.

The company’s top-line has shown only a small 7.5 per cent growth, compared to the same period last year. On a sequential basis, top-line growth is almost flat. This muted growth is not entirely unexpected as monthly sales volumes had moderated in the fourth quarter.

After clocking double-digit growth in the eight months beginning April, the number of vehicles sold grew only by 4.2 per cent in January and 1.3 per cent in February. March had been the worst month for the company where for the first time, sales volumes fell 2.1 per cent. Sales in the compact segment (Alto, Wagon R, Estilo and Swift) during this month reduced by 11 per cent compared to March 2007, never mind the excise duty cut on small cars announced in the budget.

Interestingly, besides failing to boost volumes, the duty cut has also negatively impacted revenues to the extent of Rs 55 crore. This is because of the compensation given to the dealers for vehicles purchased by them at higher excise duty and remaining unsold as on the date of announcement.

Given the spiralling steel prices, the next few quarters could see a further rise in input costs, and hence, a case for price hikes. Since the company enters into 6-month contracts for the supply of steel, the bulk of the impact on operating margins will be felt in the first half of this fiscal.
Competition up

Besides, competition in the compact car segment is already heating up and with the expected launch of the Nano in October 2008, the company may have to increase its marketing expenditure. It has already rolled out a Rs 7,000-crore plan to set up mega display-only showrooms across India and build warehouses for spare parts and vehicles to reduce lead time in delivering these to customers.

Any further developments on its long-term plan of shedding the ‘small-car maker’ image to fight competition will also be watched closely this year. The recent move into the midsize segment, the sedan version of the Swift, the introduction of ‘Splash’ at the upper end of the compact segment, the re-launch of the Grand Vitara, a multi-utility vehicle, and the expected launch of Kizashi in the A5 (premium sedan) segment in 2010 are all pointers to this.