UPDATE 2-India's largest carmaker says profits helped by sentiment, not growth

Thu Jul 31, 2014 10:15am EDT

* Apr-June qtr net profit up 21 pct on strong sales

* Planned capital expenditure of $661 mln in FY15

* Expects double-digit growth in car sales this year (Adds company comments, details on investment, auto industry context)

By Aditi Shah

NEW DELHI, July 31 (Reuters) - India's biggest carmaker, Maruti Suzuki India Ltd, warned on Thursday that its rising sales were largely driven by improving sentiment, discounts and government tax breaks, rather than any underlying economic revival.

It was commenting after beating estimates in quarterly net profit.

For two consecutive years, high inflation and interest rates have resulted in declining car sales in India, but prospects of an economic recovery under Prime Minister Narendra Modi's new government helped a rise in sales in the June quarter, according to industry data.

Maruti, however, suggested the mood was not yet cemented in place.

"The vehicle sales increase we have seen in the first quarter is not broad-based across the industry and is driven more by sentiment," Chief Financial Officer Ajay Seth said. "We are hoping the current sentiment-led recovery moves to an investment and job creation-led recovery soon.".

The company said profit for the April-June quarter was 7.62 billion rupees ($126.14 million), up from 6.32 billion rupees in the same period a year ago. Net sales rose about 11 percent to 110.74 billion rupees.

Analysts had expected the company to post a profit of 7.35 billion rupees, according to Thomson Reuters I/B/E/S.

Domestic carmakers including Maruti and Tata Motors Ltd are expected to raise their capital expenditure by 15.6 percent in the next 12 months, the most among peers in the Asia Pacific region, Thomson Reuters data showed.

India is working its way up to become the world's third-largest car market by 2018.

Maruti, controlled by Japan's Suzuki Motor Corp, said it plans to increase its capital expenditure by 14 percent to 40 billion rupees ($661 million) in the fiscal year that started April 1, compared with a year ago.

Sales of Maruti cars and utility vehicles rose 10.3 percent in the April-June quarter, led by strong performance of its small, entry-level cars as first time buyers were seen returning to the market lured by an extended tax concession by the government and high discounts offered by the carmaker.

Seth expects the upcoming festive season in India, which starts in October and is considered an auspicious time to buy homes and cars, to further boost sales.

Maruti expects to end this fiscal year with a double-digit growth in car sales compared with 3 percent growth last fiscal year, said Seth.

The company's wide dealership network, especially in rural areas where disposable incomes are rising, and a strong pipeline of new vehicles has prepared the carmaker for a recovery in demand, analysts say.

($1=60.5500 Indian rupee) (Additional reporting by Shilpa Murthy in Bangalore; Editing by Miral Fahmy and Jeremy Gaunt)

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