Maruti Suzuki Q2 net profit skids 65% to Rs 475 cr as chip shortage hurts

Maruti Suzuki
India’s largest carmaker, Maruti Suzuki India (MSIL), on Wednesday reported a 65.35-per cent year-on-year plunge in net profit at Rs 475.3 crore for the July-September quarter of 2021-22, compared with Rs 1,371.6 crore in the same quarter last financial year (2020-21).

The company said the profit was primarily influenced by a record rise in input costs and decline in production due to shortage of semiconductor chips.

However, the company expects relief on both fronts, given that production is expected to increase in November and there are signs of prices of precious metals softening to some extent. Input cost was primarily driven by an increase in commodity prices.

MSIL Chairman R C Bhargava said at 80.4 per cent of net sales, material costs stood at an all-time high at the end of the September quarter.

“This quarter was also marked by an unprecedented increase in the prices of commodities, such as steel, aluminium, and precious metals, within a span of one year,” said the company in a statement.

While MSIL undertook four rounds of price hikes to offset the cost of production, Bhargava said the company had to absorb input cost increases. He said it was unviable to increase product price without impairing sales.

Steel prices had increased from Rs 38,000 to Rs 65,000 per tonne, while the price of copper in the international market had gone up from $5,200 in 2019-20 to present-day $10,200 per tonne. Prices of precious metals, such as rhodium, too, had gone up from Rs 18,000 per gram to around Rs 64,000.

Automotive (auto) companies typically have three- to six-month contracts with suppliers. Any alteration in commodity prices manifests after some time. “The increase in material costs by 6.4 percentage points is a huge impact," said Bhargava.

Another factor hitting sales was the global shortage of semiconductor chips, forcing auto companies to scale back production and hold up delivery dates. The company was hit since one of its major supplier of parts providing electronic components from its factory in Malaysia got impacted because of a surge in Covid cases. In September and October, production had fallen to 50-60 per cent of the usual output because of a semiconductor chip shortage - a key component in modern cars and sport utility vehicles.

Semiconductor chips are used to power a variety of vehicle features, from power steering and back-up cameras to emergency braking systems. Automotive semiconductor integrated circuits with different functionalities are used in various automotive products, like navigation control, infotainment systems, and collision detection systems.

“There is a shortage of semiconductor chips. This has impacted production of cars the world over. We have a significant number of customers waiting for cars. But much of what is happening is not in anybody’s control,” said Bhargava.

The company sold a total of 379,541 units during the quarter, hamstrung by a global shortage in the supply of electronic components. Sales in the domestic market were at 320,133 units. However, exports were at 59,408 units - the highest-ever in any quarter for the company, primarily driven by Toyota dealerships the company has a tie-up with.

Due to chip shortage and electronic components, MSIL couldn’t produce 116,000 vehicles in the second quarter, mostly corresponding to the domestic models, even as the company had more than 200,000 pending customer orders at the end of the quarter.

“This is a little more than a month’s production. We never estimated we would lose so much production at the beginning of the financial year,” added Bhargava.

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