Saturday, September 01, 2012

Can maruti repeat the magic?

While everyone was scampering about, frightened by the slowdown ghost, Maruti peacefully posted a 105% increase in bottomlines during FY 2009-10. Result: it Climbed 21 places to #27 on this year’s list. But can maruti repeat the magic? By Pawan Chabra

If you look at the Q1, FY2010-11 result, the answer is an obvious no. The past quarter has been a party spoiler for the company. Not only did its domestic market share fall below 50% for the first time since it crossed that mark 25 years ago, the company registered a 20% y-o-y dip in net profits too (which fell to `4.65 for Q1, FY2010-11). So what caused the fall? Says Shinzo Nakanishi, MD, Maruti Suzuki, to B&E, “The dip in profits is because of the rising commodity prices and the royalty payments made by Maruti to Suzuki Motor Corporation.” There are other issues too.

Despite the fact that the company managed to post a 25% y-o-y growth in unit sales (of 283,324 units) during Q1, FY2010-11, currently, almost all its car models are facing a situation of undersupply. “All that we are making is being sold. We are producing as much as we can, but it is not enough. Currently, we have close to 15-20% backlog on our books,” says Mayank Pareek, Managing Executive Officer – Marketing & Sales, Maruti Suzuki, to B&E. Thus, Maruti is missing out on the opportunities presented by the increased demand in the Indian car market. Who gains? Its competitors. The Indian car market has grown by over 30% this fiscal, and what is happening is that players like Ford, GM, Volkswagen, Nissan & Hyundai, which had/have spare capacities, are filling the demand-supply gap.

Royalty payments to Suzuki is another itch. But it can do little about it. The company still depends greatly on the parent company, and it has no solution to lighten the burden, at least over the forthcoming few quarters. “Maruti depends on Suzuki for its brands and technology. So, it is very difficult to get the royalty payments down. However, I don’t think it will go above the current 5.1% mark in the times to come,” says Nakanishi.

But there is some good news for investors. The company is trying to prepone its capacity expansion plan to 2012, to solve the problem of undersupply. This will help add an additional capacity of 250,000 units per year to the current production levels. In fact, it has already started its ground work on its 6th plant at Manesar (Haryana). This, coupled with the planned R&D Centre at Rohtak (which have collectively attracted an investment of Rs.1 billion) will determine the success of the company in the years to come. But till then, the company will have to continue bearing the pain of dealing with backlogs.

The outcome for this financial year is clear. Maruti might outshine last year’s numbers in terms of unit sales, but in terms of financials, it will fall a little short, even if it scales back its market share to 50%+. As per estimates by Thomson Reuters, its bottomlines for FY2010-11 will fall by 2% to `24.48 billion. Thankfully, the fall is only marginal. For now though, the company is running hard. But so are competitors, and it knows that.


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