Maruti Suzuki Q2 profit tanks 39.4% to Rs 1,358.6 cr; but earnings beat estimates

Maruti Suzuki India, the country's largest car manufacturer, registered a massive 39.4 percent year-on-year (YoY) decline in profit due to weak auto sales amid subdued demand in the economy.

The profit declined to Rs 1,358.6 crore in the quarter ended in September from Rs 2,240.4 crore in same period in 2018. A sharp fall in corporate tax expenses (as the company enjoyed the maximum benefits because of the corporate tax rate cut announced by the government in September) and higher other income helped the company limit the profit decline.

"Net profit fell on account of lower sales volume, higher sales promotion expenses and higher depreciation expenses, partially offset by cost reduction efforts, higher fair value gains on invested surplus and reduction in corporate tax rate," Maruti said in a BSE filing.

The revenue during the quarter dropped 24.3 percent YoY to Rs 16,985.3 crore as volumes fell 30 percent YoY.

"This year, the automobile industry has seen a significant decline in sales owing to several factors. One of the main factors is increase in the cost of acquisition of the car due to various reasons coming together like implementation of more stringent safety and emission (BS6) norms, increase in vehicle insurance expenses and hike in road taxes in many states. Along with this, the lower availability of finance and increased down payment requirement have affected the affordability of customers to own cars," company reasoned for lower sales volumes.

At the operating level, earnings before interest, tax, depreciation and amortisation (EBITDA) was down 53.2 percent to Rs 1,606.3 crore, and the margin contracted to 580 bps to 9.5 percent compared to year-ago.

"The margin was impacted by lower capacity utilization, and higher sales promotion and depreciation expenses. However, it was supported by higher fair value gain on invested surplus, cost reduction efforts, lower advertising expenses and benefit due to reduction in corporate tax rate," the car maker said.

The stock fell around 2 percent intraday, which could be due to the cautious management commentary, profit booking after recent sharp run up in the stock and fall in margin below 10 percent mark.

Analysts retained their rating on the stock after earnings, saying they will change their stance once the economic growth exceeds 6 percent again.

"When economic growth exceeds 6-6.5 percent then consumption picks up and then we will change our stance from neutral," Mitul Shah of Reliance Securities told CNBC-TV18.

Chirag Jain of SBICAP Securities, who has hold rating on the stock, said the upside is capped in near term due to slowdown, but he will revisit estimates.

"There could be 5-10 percent earnings upgrade due to maximum use of tax rate cut," he added.

Quarterly earnings were better than analyst estimates. According to average of estimates of analysts polled by CNBC-TV18, the profit was estimated at Rs 922 crore on revenue of Rs 16,765 crore and EBITDA was expected at Rs 1,474 crore with margin at 8.7 percent for the quarter.

Total tax expenses fell sharply during the quarter to Rs 213.4 crore against Rs 970.6 crore in corresponding period last fiscal while other income increased by 74.7 percent YoY to Rs 920 crore YoY.

In the first half of FY20, profit declined 33.7 percent to Rs 2,791.4 crore and revenue slipped 19.6 percent to Rs 34,855.6 crore compared to same period last year as volumes dropped 24 percent to 7.4 lakh units compared to year-ago.