Maruti cautious on the road ahead

Maruti Suzuki India is gearing up to take on competition. From building a direct railway link from its Manesar assembly line to Mundra terminal for hastening exports to increasing spend on research & development, to concentrating on alternate fuel vehicles and hybrids, it is, oh, going full throttle.

But in a candid admission of the challenging times ahead, managing director Shinzo Nakanishi says in the latest annual report that profit margins in the long term cannot remain at “unusual” levels of over 10%.

“Barring last year, Maruti has been able to generate good margins till now. In the short term, some reversal of commodity prices and better forex management may help improve margins. In the long term, a more competitive environment will ask for faster product refreshment, more investment in quality, technology and brand, which may put a downward pressure on margins… (over 10%) levels were unusual and we are not targeting those at present,” Nakanishi says.

In a bid to keep margins healthy, the company has already asked vendors to increase efficiency through various programmes (such as reducing the weight of each component that goes into making cars by a gram) while simultaneously building their own research and development capabilities. Besides, Maruti itself has decided to begin designing independent full bodies of different models, according to chairman R C Bhargava.

Maruti’s insistence on improving systems and processes is crucial because it has managed to gain only a marginal share in the passenger car market last fiscal — from 51.4% to 52.2% — and Nakanishi has indicated in the past that with the arrival of the Tata Nano and other competing vehicles, the company may lose some market share.

On the export front, however, it appears well-poised since Maruti is targeting over one lakh unit car exports this fiscal, against only 70,023 units in 2008-09. It exports A-Star, Swift, Alto and M-800 among other models to over 100 countries.

Nakanishi has talked about several other initiatives the company has taken to keep ahead. The first ‘Brand Centre’ has already come up in Vasant Kunj, Delhi and the first stockyard for vehicles is being readied in Bangalore. Each of these initiatives is expected to help improve its sales and reach with customers. Also, a ‘roll-on-roll-off’ terminal is being built at Mundra in Gujarat to ease vehicle shipping.

During 2008-09, Maruti raised its production capacity to a landmark one million units and incurred a total capital expenditure of about Rs 1,675 crore. “In 2009-10, the company will continue to modernise some parts of the Gurgaon plant, expand the K-series (engine) capacity, invest further in new model development and take projects of test track and crash course facility (coming up at Manesar) further.

In a recent conference call with analysts after declaring the results for the June quarter, senior company officials had asserted that in case market conditions required the company to produce more than a million vehicles, no additional investment on capacity creation was needed and up to 1.2 million units could roll off the current facilities of Manesar and Gurgaon.

In the June quarter this year, Maruti managed to sell almost 10% more cars year on year in the domestic market because of customer preference for higher end models and diesel cars despite lower average discounts, and improved sales in rural markets. Sales of diesel cars have increased by a whopping 66% year on year even when the discount per car fell to an average Rs 9,500 from about Rs 12,000 in the March quarter this year. Also, rural sales have improved to account for 12% of overall sales against just 9% in the whole of last fiscal.

But the firm remains cautious in giving an outlook for 2009-10, maintaining a “month by month” approach and has even distanced itself from the 5% growth target set out at the beginning of this fiscal.

“The top 10 cities are still not responding, the next 10 cities have seen some growth and so on… Then, while our new models are growing, the older cars are not showing growth, which means growth (in car sales) is still sporadic, uneven, limited to some geographies, models and players. Which is why we have brought in flexibility into the system and are doing month-to-month assessment instead of sticking to the earlier growth forecast,” Maruti officials said in a recent conference call with analysts.