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Maruti cruising towards profit path

BS Corporate Bureau

Car maker Maruti Udyog Ltd is heading for a turnaround this year, after posting losses of Rs 2.69 billion in 2000-01, ahead of a rights issue aimed at divesting the government's shareholding in the company.

A company source said that Maruti will post profits "in million" during the financial year despite a Rs 300 million higher depreciation than last year and sluggish market conditions.

Profitability has increased due to cost reduction across the value chain, fall in average defects and retaining volumes in a sluggish market.

Maruti had posted a profit of Rs 300 million in the first half of the year as against a Rs 1.04 billion loss in the corresponding period last year. But with the second-half sales not improving, profitability was expected to be hampered.

Maruti Udyog's managing director Jagdish Khattar had indicated that the depreciation charge, which was one of the major factors for the net loss in 2000-01, would be even higher in the current year.

In its latest report on Maruti, credit rating agency ICRA has also said that the car maker has achieved an "improvement in profitability levels" in the first 10 months of 2001-02.

It has also reaffirmed the highest safety ratings of A1+ to Maruti's Rs 1 billion commercial paper programme and a LAAA rating to its Rs 2 billion non-convertible debenture programme.

Although financials for the full year will be available only next month, sources indicated that Maruti may be back to black given that it has continued to perform well in the past two months.

Icra has attributed the improved profitability to increased levels of localisation of new models, cost reduction of local components and a weak yen.

It has also noted that there has been an improvement in the company's contribution margins in 2001-02.

While reaffirming the rating, Icra said it had considered Maruti's continuing dominance of the Indian passenger car industry, high bargaining power with vendors, its new business initiatives and high financial flexibility as reflected in its low gearing.

The expected cash inflow into MUL following the government's proposed divestment has also been considered in reaffirming the ratings.

"MUL has been able to stem the decline in its market position, with its overall market share improving to 60 per cent in April-December 2001 vis a vis 56 per cent in the corresponding previous", Icra noted.

While the launch of Fiat's Palio and Tata Engineering's Indica V2 has increased the competitive pressures on MUL, the company remains the single largest player in the growing mid size segment, Icra said.

In a market characterised by increasing competition, it is likely that MUL would concede marketshare in percentage terms.

But it is still expected to remain the dominant player in the passenger car industry, the rating agency maintained.

The market is highly fragmented with MUL's closest competitor having an overall share of 15 per cent.

"The relatively lower profitability levels of most competitors and their distribution channels would make it difficult for them to match MUL's reach," Icra said.

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