The company has had a great 2006-07 but the competition could creep up on it this year
A new plant in Manesar, Haryana, the runaway success of the Swift and an entry into the diesel segment. To be sure, the Rs 14,592 crore Maruti Udyog has had an exciting 2006-2007. What’s more, cashing in on the excise duty sops for small cars, the company posted sales of nearly 6.75 lakh cars, a smart 20 per cent increase over FY05-06. Next month the Delhi-based car maker, which even today commands a 50 per share of the Indian car market, will launch the SX4 sedan, a replacement for the Baleno. That will be followed by locally made variant of the premium SUV Grand Vitara. Already, four of its models– Alto, WagonR, Zen Estilo and Maruti-800 – are among the six top selling cars in the market.
That should be enough to make Maruti’s managing director, Jagdish Khattar feel relaxed. But clouds are beginning to appear on the horizon. To begin with, rising interest rates are already beginning to slow down car sales. Says Khattar, “Car sales in the last fiscal were mainly driven by lower excise duties which made them more affordable. The higher interest rates and price changes are expected to slow down sales and we believe the impact of lower customer demand will be clearly visible in the current quarter.”It’s not just the momentum in the top line that’s likely to be disturbed. The rising cost of raw materials such as steel, has already put pressure on the company’s operating margins. Despite a strong top line growth in FY07, operating margins remained flat at 13.6 per cent. And Khattar says higher input costs could continue to pressure margins.
In an effort to prop up sales, Maruti is trying to persuade banks to reduce the interest burden on customers. Besides, it’s increasing spends on promotions. Incidentally, the percentage of car sales that take place through financing has dropped from over 80 per cent to 70 per cent in the last quarter. So, it would appear that more cars are being bought without customers opting for loans. “However, it seems there are many who have decided to postpone their purchases, either through a loan or otherwise. So, it would appear that there has been an impact on sales due to higher interest rates” observes Khattar.
To beat the competition, loans for Maruti’s cars are being priced at the lowest rates in the industry– 8.59 per cent per annum
, which is about 40 basis points lower than that offered by arch rival Hyundai Motor, makers of the popular model Santro.
What’s also posing problems for Maruti is the short supply of diesel engines. The company rolled out a diesel version of the Swift in January, making an entry into the diesel space. However, Suzuki Motor Corporation’s (SMC) diesel engine plant –in which Maruti also has a stake–also in Manesar, is unable to supply more than 2500 engines per month
Explains Khattar,”There is good demand for the diesel version of the Swift but we’re not getting adequate supplies of diesel of engines from our parent company, SMC. SMC has allotted some of the production from the plant to its Hungarian subsidiary. We are already utilising our full quote of 2500 diesel engines for the Swift.” What this means is that Maruti will not be in a position to cash in on any demand beyond 2,500 cars a month. That’s a pity because Maruti had been criticised not so long ago for its ageing portfolio of cars. And now that the diesel Swift has takers, it can’t feed the market.
Analysts, however, feel the company needs to come up with more new models. “The company’s recent launches have been well accepted, but all the models are in the A2 segment. The SX4 sedan is expected to do well, but Maruti needs more vehicles in the faster growing segments,” points out Huzaifa Suratwala, who tracks the automobile sector at Emkay Shares. The car maker’s inability to replace its fading models Gypsy, Versa and Omni is also going against the company. “Maruti needs to overhaul its entire range and should bring in more models like the Splash and Cervo. That would help it maintain its strong growth and its leadership position,” says Arvind Jain, analyst with Religare Securities. Adds an industry watcher, “Competitive pressures are only going to increase this year with Renault and General Motors already present in the budget segment and Hyundai revamping its portfolio.” Looks like it’s not going to be a smooth ride for Maruti this year. Not so swift any more