Forbes India 15th Anniversary Special

Higher volumes, premium cars drive Maruti's FY 17 performance

The car maker's margins are under pressure due to higher material costs and adverse forex movement

Published: Apr 27, 2017 06:47:59 AM IST
Updated: Apr 27, 2017 05:42:19 PM IST

Image: Anindito Mukherjee
The strong revival in fortune that Maruti Suzuki has scripted is continuing and in that context, 2016-17 has been a great year for India’s largest car maker.

Its sales, in terms of volumes, rose by about 10 percent to touch 15.69 lakh units including exports of 1.24 lakh units. But the bigger story is its foray into premium vehicles. After tasting success with Ciaz, Baleno and Brezza Vitara in 2015-16, the company launched Ignis in January this year. The car, targeted at millennials, has been well received. It is not surprising that revenue from operations increased by 19 percent to Rs 77,316 crore compared to Rs 65,106 crore in 2015-16. The good news does not stop there.

The company’s net profit rose by 37 percent to Rs 7,511 crore (Rs 5,497 crore in 2015-16). Multiple factors contributed to this steep increase. New product launches drove the volumes up and the company was able to utilise its capacity fully this year. Also, the share of premium cars in its overall sales increase improving the margins. There were also significant cost reductions the company has managed thanks to thousands of suggestions the company receives from its workers.

A very good year would have turned out to be even better if commodity prices had not risen sharply. This has caused material costs to rise by 360 basis points to 70.8 percent of total sales in the fourth quarter of 2016-17. This plus, adverse foreign exchange movement saw Maruti’s operating profit margins taking a 140 basis point hit in Q4 to 14.2 percent.

The results did not go down well in the stock market. The stock which was trading at Rs 6,430 levels in the morning fell to Rs 6320 levels after the results and finally closed at Rs 6355 levels, an intraday decline of 0.8 percent.

With the company’s Gujarat plant coming into operation this fiscal, analysts have warned that in the absence of strong volumes growth the company would not be able to hold onto the current level of profitability on account of higher depreciation charge.

Post-results, HDFC Securities in a report has reposed confidence in the company’s ability to grow its volumes. Uptick in rural demand and supporting macro tailwinds like 7th Pay Commission payout, declining interest rates and growing middle class will fuel the volume growth. This growth, it says, will also be supported by the success of its new models and additional capacity flowing from the Gujarat facility.