Maruti Suzuki India, the country's top automaker, reported a smaller-than expected 7 percent fall in quarterly profit, as high costs of raw materials and a new depreciation policy outweighed higher sales.
Maruti, 54.2 percent owned by Japan's Suzuki Motor, has nearly half the Indian car market, with models such as the best-selling Alto and Swift hatchbacks, and has been shifting consumers to premium models such as the DZire sedan.
But the high cost of raw materials such as steel have hit margins, while firm interest rates, rising inflation and a fuel price hike have dented demand in Asia's third-largest economy.
It is also facing more competition from rivals such as Hyundai Motor, General Motors and Fiat in a market that is forecast to record 2 million units in passenger vehicle sales by 2010.
It will face the greatest pressure in the small car segment, with Tata Motors scheduled to launch the Nano, priced at just above $2,500, and a venture of Bajaj Auto with Renault and Nissan building a similar car.
New Delhi-based Maruti said net profit fell to 4.66 billion rupees ($109 million) in its fiscal first quarter to end-June from 4.99 billion rupees in the same period a year earlier.
There was a charge of 619 million rupees from a shorter depreciation cycle introduced in the previous quarter, it said.
Net sales rose 21 percent to 47.31 billion rupees. It sold 192,584 units in the June quarter, an increase of 13.5 percent from a year earlier.
That compared with a forecast of a net profit of 4.55 billion rupees on net sales of 46.65 billion in a Reuters poll.
Its operating margin fell to 10 percent from 14.6 percent a year earlier.
In the June quarter, Maruti had a hedging reserve of 1.35 billion rupees which it said would be recognized when the underlying transaction arose, a change from the earlier practice of recognizing it at the end of each period.
Other derivatives recorded at fair value had a resultant net loss of 139 million rupees in the June quarter, it said, while cost of raw materials rose nearly a fifth.
Maruti has benefited from a cut in excise duty on small cars to 12 percent from 16 percent, and has also raised prices of most models by up to 15,000 rupees to offset higher input costs.
A weaker rupee is boosting earnings from exports, while an increase in annual capacity to 1 million units by 2009/10 will yield greater economies of scale for Maruti, which will account for about a third of Suzuki's global sales in 2010/11.
Maruti, which has launched seven new models in the last three years, will make A-Star cars from late 2008, and then the Splash.
Ahead of the profit results, shares in Maruti ended up 3.9 percent at 648.20 rupees in a firm Mumbai market.
Shares in Maruti, which has a market value of about $4 billion, trade at 9.11 times forecast earnings, compared to a multiple of 8.72 times for top vehicle maker Tata Motors.
Maruti shares fell 26 percent in the quarter, compared to a 21 percent fall in the auto index and a 14 percent decline of the key index.