India's top car maker Maruti Suzuki cited input costs and currency volatility as concerns after meeting street estimates with a 5 per cent rise in quarterly net profit on strong demand.
Car sales in India increased by more than a third in the September quarter, fuelled by robust economic growth, and are set to remain strong this quarter as festive season demand peaks in November.
However, automakers have had to curtail production in recent months because of the slow growth in component supplies. Rising interest rates, higher raw material prices, and the inability to pass on higher costs to consumers have put pressure on margins.
"There may be upward pressure in the second half also," said Maruti Suzuki Managing Director Shinzo Nakanishi, referring to input costs.
"We have to watch forex movement, particularly yen appreciation," he said on Saturday.
Maruti, 54.2 per cent owned by Japan's Suzuki Motor, sells roughly half the cars in India but is facing intensifying competition from the likes of South Korea's Hyundai Motors, the second-largest car maker in India and Ford Motor, as well as domestic rivals.
India's automobile industry is likely to grow by 18-20 per cent in the fiscal year that ends in March, according to the sector body Society of Indian Automobile Manufacturers (SIAM).
While demand for cars in developed markets is stuck in low gear, global automakers have been increasing their focus on faster-growing regions such as China, now the world's largest auto market, and India.
India is one of the world's fastest growing markets for cars as an economy growing at 8.5 per cent boosts income.
"We expect the demand momentum to continue in the second half of the year," Nakanishi said.
Maruti plans to invest $1.3 billion over the next three years on manufacturing plants to boost capacity. Last month, the company said it would build a fourth auto plant in India to lift output to 1.5 million units a year.
The new factory would start operations in 2013, with annual capacity of 250,000 cars.
Maruti expects to sell 1.2 million vehicles in 2010/11 from 1.02 million in the previous year, it said last month.
The New Delhi-based firm reported net profit of 5.98 billion rupees ($135 million) for its fiscal second quarter ended Sept. 30, up from 5.70 billion rupees a year earlier. Sales climbed to 89.37 billion rupees from 70.5 billion.
A Reuters poll of 18 brokerages had forecast net profit at 5.88 billion rupees on sales of 90.44 billion rupees.
EBITDA (earnings before interest, tax, depreciation and amortisation) margins fell to 10.7 per cent in the September quarter from 13 per cent in the year-ago period, and Chief Financial Officer Ajay Seth said Maruti aimed to protect margins.
Maruti reported a 12 per cent decline in profit in the June quarter with a surprise rise in royalty payments to its parent, weeks after India scrapped a ceiling on royalty payments by local companies to their overseas partners.
Media reports have said German car maker Volkswagen may extend its global partnership with Suzuki Motor Co by tapping Maruti's manufacturing and design facilities in India.
Maruti shares, worth about $10 billion, are down 0.5 per cent this calendar year, lagging the sector index which is up by a third, and the main index which has risen nearly 15 per cent.