Maruti net profit drops 36.7%, margins under pressure

Maruti net profit drops 36.7%, margins under pressure
AGENCIES

JUNE 26: Hit hard by the increasing impact of price cuts and depreciation on its huge investments, Maruti Udyog Limited has registered a 36.7 per cent decline in net profit for the 1999-2000 fiscal at Rs 330 crore as against Rs 522 crore a year ago.

The board of directors of Maruti met here today to consider the annual results and approved a lower dividend of 25 per cent for 1999-2000 as against 30 per cent a year ago, company sources said. However, the turnover, riding on increased sales of its passenger car models, was higher at Rs 9,673 crore, up 19.1 per cent from Rs 8,118 crore a year ago, the sources added.

The net profit has been plagued by the depreciation on its huge investments made for introducing new models and for upgrading existing models following implementation of stricter emission norms during the year, the company sources said.

The directors, at the marathon five-hour long meeting, also considered ex-post facto the price cut that was announced on Saturday on three of its models -- Maruti 800, Omni and Wagon-R -- and assessed its likely impact on the bottomline.

The board was of the view that the new reduced prices, to be in place for three months, should help boost sales. However, it felt that the bottomline would be plagued for the current fiscal as well due to the huge interest burden on its market borrowings and the depreciation on its investments.

The company attributed the drop in profits in the 1999-2000 fiscal to depreciation from its huge investments at the Gurgaon plant, heavy interest burden and the impact of the price cuts announced in December 1998, the sources added. The board also considered the impact of the Rs 300 crore that the company had borrowed from the market. Maruti had raised Rs 300 crore from the market as short-term and long-term borrowings to fund its ambitious expansion programme, new car launches and increased working capital requirement.

The 5-10 per cent cut in car prices announced by Maruti may not be enough to reverse a declining market share, analysts said. Maruti, an equal venture between the Indian government and Japan's Suzuki Motor Corp, once held an overwhelming 80 per cent of the market, but is now down to around 52 per cent.

"We do not see this winning back market share (for Maruti), or kickstarting the car market," an automobile analyst at a leading foreign institutional investor, who asked not to be identified, told Reuters on Monday.

The analyst said the change in market shares in the car market was driven largely by new models and the price reduction would, at best, help in arresting its declining market share. They reversed recent increases in car prices following changes in engine technology after the tightening of emission norms and a change in the structure of local taxes in India.

OTHERS MAY FOLLOW: The reduction in the price of Maruti's 800 model, however, could create pressure on another car maker, Tata Engineering and Locomotive Company (TELCO), to reduce prices. TELCO launched India's first indigenously-built car, the Indica, last year and challenged the market by offering a 1,400 cc car roughly 25 per cent cheaper than the models on offer.

"TELCO sold 5,193 cars in May 2000 and 5,211 in April, lower than the 7,500-odd that it must sell a month to reach its target of 90,000 units in 2000/20001," the analyst said. Daewoo Motors, Hyundai and TELCO, which have launched new models during the last two years and priced slightly higher than Maruti's 800 model, which once held a near monopoly as a cheap and fuel-efficient model.

The 800 model is now considered by many to be jaded but its price is still a big draw. "It is crucial for Maruti to retain a sufficiently large price differential between its 800 model and the new models of these companies," RC Bhargava, Maruti's former managing director said. "Without it, there will be a switch away from its models," he said.

Maruti managing director Jagdish Khattar, announcing the price cuts, said on Saturday that he expected the price reductions to "kickstart the market from its current uncertainty", much like it had at cut in its 800 cc model prices did in 1999.

Indian car sales grew 55.8 per cent in fiscal 1999/2000 (April-March), and Maruti's own 24 per cent. But since then its sales have slowed. Its May sales of 27,533 units were 18.3 per cent lower than May 1999 while total car sales grew 18.4 per cent.