India's biggest carmaker Maruti Suzuki reported on Saturday quarterly net profit fell by a surprise 20 per cent as the company was pummelled by a surge in raw material costs.
Maruti, majority-owned by Japan's Suzuki Motor Corp, said net profit during the fiscal first quarter slid to 4.65 billion rupees ($99 million) from 5.84 billion rupees a year earlier, despite a 27 per cent leap in sales.
The fall was a shock for financial analysts who had forecast Maruti would report a profit of around 6.6 billion to seven billion rupees for the three months to June 30.
"The drop in net profit is due to higher commodity prices" along with other factors such as a fall in earnings from European exports due to a weaker euro, the company said in a statement.
While car sales have soared, the sector has been under pressure from rising prices of raw materials, such as steel, aluminium and rubber, that have been driven by growing demand in emerging market giants such as China and India.
Maruti, which has been producing to maximum capacity and sells nearly every second car in India, reported it had paid 60.80 billion rupees for raw materials -- a 26 per cent rise from same quarter last year.
Some companies have passed on the higher raw material costs to consumers, but others, such as Maruti, have held the line in the face of increasingly fierce competition from domestic and global rivals.
Foreign companies from South Korea's Hyundai Motors to General Motors of the United States have launched a slew of new cars in India to grab a larger slice of the fast-growing market and counter sluggish demand in developed countries.
Domestic competitors such as Tata Motors also are stepping up pressure on Maruti.
Maruti's net sales jumped to 80.51 billion rupees from 63.40 billion rupees while unit sales grew by 25 per cent to 283,324, including exports of 40,437 units, a 38 per cent rise over the same year-ago period.
The slide in first-quarter net profit contrasted with a 105 per cent profit leap Maruti posted in the 2009-10 fiscal year. It marked Maruti's first decline in quarterly profit in five quarters.
Higher royalty payments for use of Japanese technology, of 1.89 billion rupees, including a one-off back payment of 651 million rupees, to parent Suzuki Motors, which holds 54 per cent of the company, also dragged down profits.
An analyst who did not wish to be named said the royalty payments raised questions about how much profit Suzuki plans to take out of the company and had implications for Maruti shareholders.
"It's a big issue," he told AFP.
The fast-growing Indian car market has become increasingly key to Suzuki. Eighty per cent of its nearly $370 million operating profit in the half year to September 2009 came from Asia, with Maruti kicking in the lion's share.
India is now Asia's third-largest car market, outstripped only by China and Japan, and is one of the few countries where automobile sales are rapidly increasing.
India remains a highly under-penetrated market with about eight cars per 1,000 people compared with around 850 vehicles per 1,000 people in the United States, according to industry estimates.
The Society of Indian Automobile Manufacturers expects car sales to increase by 12 to 13 per cent to 1.7 million units in the fiscal year ending March 2011.