Maruti Suzuki, India's top car maker, beat estimates with an 18 percent rise in its fiscal first quarter net profit on Tuesday that coincided with another interest rate hike by the Reserve Bank of India (RBI) that made the outlook for the car sector murkier.
Net profit for April-June was helped by 1.8 billion rupees of other income, mainly due to higher returns on the company's investments, compared with 1 billion rupees in the year-ago quarter.
Car makers in the country are seeing a drop in demand amid surging interest rates and fuel prices in the world's second-fastest growing auto market after China.
The demand outlook has weakened further after the central bank surprised investors by raising interest rates by 50 basis points on Tuesday, showing unexpected resolve in fighting persistently high inflation.
"The surging interest rates accentuates the problem for companies, especially in a market where customers are very sensitive to prices," said Vijay Chugh, a sector analyst with Ambit Capital In Mumbai.
Car sales, which grew at a breakneck 30 percent in the fiscal year that ended in April, are now expected to grow by just 10 to 12 percent this fiscal year, down from an earlier forecast of 16 to 18 percent, an industry group earlier said.
Car sales in Asia's third-largest economy, which in June saw their slowest pace of growth since March 2009, are driven by a burgeoning middle class that mostly relies on bank loans for purchases.
The latest interest rate increase was its 11th since March 2010, making the RBI one of the most aggressive inflation fighters among central banks and hurting demand for credit-based purchases.
Petrol and diesel prices have also gone up in recent months, putting increased pressure on wallets.
"It will be a challenging demand environment for automobile companies this year," Chugh said, adding that increasing competitive pressure will also weigh on the financial performance of companies like Maruti Suzuki.
Maruti expects the higher interest rates to dent investor sentiment, but expects demand to pick up momentum during the festive season that starts in September and peaks in November after Diwali.
"It is unfortunate that interest rates are moving up so frequently. So, there is bound to be an impact on consumer sentiment," Maruti's Chief Financial Officer Ajay Seth told Reuters in a phone interview.
Maruti, 54.2 percent owned by Japan's Suzuki Motor, said vehicle sales fell nearly 1 percent from the year-ago quarter to 281,526, while higher commodity costs weighed on margins.
Maruti also faced more than $90 million in lost output this quarter as a 13-day strike by employees at one of its facilities crippled production.
Shares in Maruti ended down 0.4 percent at 1,176.95 rupees on Tuesday, after having risen as much as 1.7 percent earlier in the Mumbai market that closed nearly 2 percent down. Rival Tata Motors dropped 3.3 percent.
BEATS FORECASTS
New-Delhi based Maruti reported net profit of 5.49 billion rupees ($124 million) for its fiscal first quarter ended June 30, up from 4.65 billion a year earlier. Sales climbed 3.3 percent to 83.2 billion rupees.
A Reuters poll had forecast profit at 4.33 billion rupees for Maruti, which sells roughly half the cars on Indian roads but faces competition from the likes of South Korea's Hyundai, the No.2 in India, as well as domestic rivals.
Indian automakers are seeing pressure on operating margins as commodity prices, including those of steel, rubber and other materials, continue to rise.
"Higher commodity prices and foreign-exchange volatility put pressure on margins," Maruti said in a statement on Tuesday. "The market was sluggish, mainly due to a sharp increase in fuel prices and higher interest rates," it said.
Maruti spent 65.02 billion rupees on raw materials in the first quarter, up from 60.8 billion in the year-ago period.
Maruti shares, worth about $8 billion, are down more than 17 percent this year, underperforming the auto sector index which has fallen 14 percent and the main index that is down nearly 10 percent.
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