As market share falls, Maruti speeds up capacity ramp-up

Maruti Suzuki is expanding capacity faster than planned to offset shrinking market share and meet extraordinary demand for passenger cars.

Under a new plan, Maruti’s annualised production will be higher by 20,000 vehicles to 1.3 million from the second half of this year.
A company spokesperson confirmed this, saying debottlenecking, process-flow changes and alterations in the model mix between its two manufacturing plants would lead to higher production.

He also acknowledged that in the last one year, India’s largest car maker has lost about seven percentage points in market share (from 54% to 47%) up to the June quarter.

Though Maruti sold 25% more cars at 283,324 units in the first quarter compared with the same period last fiscal, the loss in market share is largely attributed to increased competition.

Jamshed Dadabhoy and Arvind Sharma of Citigroup Investment Research said capacity concerns should abate from the second half of this fiscal as Maruti gears up to an increased run rate of 1.3 million units.

On the exports front, “a geographic mix shift in export markets should buffer Maruti from euro realisation volatility - 50% of the current fiscal’s exports will be from non-European Union markets,” Dadabhoy and Sharma said in a note after the results.

They said margin pressures could continue into the September quarter but improve thereafter as contracts for raw materials are expected to be rolled over.
S Arun, analyst with Bank of America Merrill Lynch, said Maruti’s domestic growth rate should remain at 15% over the next two years and distribution reach should improve further, even as he cautions over market share loss.

“We expect 800 basis points loss in market share at about 45%, factoring success of competition so far and further new products from Toyota and Hyundai,” Arun said in a note.

Sanjay Doshi, analyst with Macquarie Securities, said uncertainty remains over the period and terms of the new royalty agreement between Maruti and parent Suzuki Motor of Japan.
Fears on this led to the company’s share being beaten down by more than 12% on Monday.

Increased royalty payout has been cited as one of the biggest reasons for Maruti posting the largest fall in net profit in the last five quarters.

In a note, Doshi said though the company has done “reasonably well so far in limiting market share losses......However going forward we believe that the company will not be able to increase prices to combat both rising raw material prices and higher royalty payments without impacting sales.”