Maruti Suzuki Profit Falls on Rising Raw Material Costs, Yen, Royalty Fees

Maruti Suzuki India Ltd., India’s biggest carmaker, posted an 18 percent drop in third-quarter profit as a stronger yen, higher royalty payments and increased raw material prices damped gains from record sales.

Net income fell to 5.65 billion rupees ($123 million) in the three months ended Dec. 31 from 6.87 billion rupees a year ago, the company said today in a statement. Profit fell short of the 6 billion-rupee average of 34 analyst estimates compiled by Bloomberg. Sales gained 27 percent to 92.7 billion rupees.

Maruti spent 27 percent more on steel, rubber and other materials in the quarter as rising economic growth in India and China boosted commodity prices. Competition is increasing for the New Delhi-based company as Toyota Motor Corp., Ford Motor Co. and other global automakers expand factories and add more models in India.

“Maruti has been seeing pressure on its margins from increased commodity prices,” Jatin Chawla, who has a “reduce” rating on the stock at India Infoline Ltd. in Mumbai, said before the announcement. “The company was unable to raise prices due to the increased competition.”

Maruti fell 3.2 percent to 1,229.35 rupees in Mumbai yesterday. The stock declined 14 percent this year, compared with a 10 percent drop in the Bombay Stock Exchange’s benchmark Sensitive Index.

Higher Royalty

In December 2009, the Indian government lifted restrictions on the payments that can be made to overseas partners, allowing companies such as Suzuki Motor Corp. to charge higher royalty fees from their Indian subsidiaries.

Maruti paid a royalty of 5.2 percent of its net sales in the quarter, compared with 3.7 percent a year ago, Chief Financial Officer Ajay Seth said in a conference call after the earnings were released.

The Japanese yen strengthened 2.3 percent against the Indian rupee in the period, according to data compiled by Bloomberg. Maruti expects the yen to decline against the dollar, Seth said.

Maruti sold a record 330,687 vehicles in the three months ended in December, compared with 258,026 units a year earlier. That included exports of 31,160, it said in the statement.

“We expect the demand momentum to continue into the next quarter,” Seth said. “However, we are concerned about rising fuel prices, interest rates and credit availability.”

Price Increase

The company raised prices of its models by as much as 2.3 percent starting Jan. 17, according to Mayank Pareek, managing executive officer in charge of marketing and sales. Tata Motors Ltd., maker of world’s cheapest car Nano, Volkswagen AG, and General Motors Co. have also raised vehicle prices in India to offset rising input costs.

Indian steelmakers including Tata Steel Ltd., Steel Authority of India Ltd. and JSW Steel Ltd. raised prices by about 13 percent in the last quarter amid rising demand.

Suzuki Motor Chairman Osamu Suzuki said in November that competition in the Indian car market would be “very tough.” Volkswagen, Nissan Motor Co. and GM also started selling in India small cars that account for about 78 percent of the nation’s auto sales. Maruti sells seven hatchbacks.

Toyota, the world’s largest automaker, has won about 21,000 orders for the Etios model since the car’s debut in India in December. Ford said in August it would introduce eight models in the nation by 2015, after its first small car for the market went on sale last year.

Slowing Demand

Car sales in India may increase 18 percent this year, Pawan Goenka, head of the Society of Indian Automobile Manufacturers, said Jan. 11. Shipments jumped 31 percent, the fastest pace of growth in at least six years, to 1.87 million last year, according to the group.

Demand may slow this year because of higher automobile prices and rising interest rates. India’s central bank raised the benchmark interest rate to a two-year high on Jan. 25.

Maruti aims to raise production capacity 46 percent to 1.75 million vehicles annually after building new factories near New Delhi, Osamu Suzuki said in September. Maruti has an existing capacity of 1.2 million vehicles a year.

The company expects to complete one of the factories, with a capacity to produce 250,000 cars annually, by the second half of next year. The other plant, with a similar capacity, will be completed in 2013. The company is spending 17 billion rupees on the new plants.

To contact the reporter on this story: Siddharth Philip in Mumbai at sphillip3@bloomberg.net.

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net.

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