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Maruti Suzuki under pressure from diesel, discounts and forex

While there is huge demand for diesel cars, Maruti Suzuki cannot produce enough and what it is producing (petrol cars) in bulk, it cannot sell without discounts

Maruti Suzuki India Ltd, the country largest carmaker, reported 29% drop in its full year net profit due to adverse currency movement, higher discounts offered on its vehicles and increased commodity prices. The overall slowdown in the car market, including the skew towards diesel cars, also affected performance, the company said.
Rising fuel costs, especially increasing petrol prices are making it difficult for buyers to opt for cars that run of petrol. Despite the new found success with diesel engines, Maruti Suzuki is still known as petrol carmaker. The company produces about 16 lakh vehicles every year, out of which diesel cars are around 29% with the rest being petrol cars. And this is the cost the company had to pay during FY2011-12. There is a waiting period of over 4-5 months for Maruti Suzuki's diesel cars like Dzire and Swift. Even its newly launched multi-utility vehicle (MUV) Ertiga has witnessed an overwhelming response for diesel based engine (about 80%) from the total bookings of 22,000.

During the year, Maruti Suzuki's petrol car sales fell 14% while diesel car sales increased by 37%. Falling sales in petrol cars is making the carmaker to spend more money by way of huge discounts and advertisements. During the fourth quarter of FY11-12, Maruti Suzuki offered an average discount of Rs13,439 per vehicle compared with Rs12,000 in third quarter.

Looking at the auto market, there is no doubt that this trend is likely to remain through next few years, unless the government decides to completely do away with the subsidy on diesel for cars. But this also could pose problems for the carmaker as the removal of the subsidy may affect diesel car sales.

In a research note, Emkay Global Financial Services said, “Outlook for FY12-13 continues to remain subdued for petrol vehicles driven by rising cost of ownership and increase in fuel prices. Maruti Suzuki is taking steps to lower cost of ownership by offering exchange bonuses, targeting customers with lower usage and considering interest subventions."

The company, a unit of Japanese Suzuki Motor Corp, has been trying to focus on diesel cars, but due to production constraints could not do so. Maruti Suzuki has already invested around Rs1,700 crore to increase its diesel engine capacity, however, the additions would be coming on stream only during first half of next financial year (FY13-14). At present, Maruti Suzuki's diesel engine capacity is 2.5 lakh units per year, which will go up to 4 lakh units in FY13, including 3 lakh from Suzuki Powertrain India and 1 lakh from Fiat. It plans to add another 3 lakh units per year from its Gurgaon plant. However, the new diesel engine plant in Gurgaon is expected to come on stream in first half of FY13-14 with a capacity of 1.5 lakh units and rest 1.5 lakh units by FY14-15.

While the capacity expansion looks good for future use, one fails to understand why the carmaker could not take a call on increasing diesel engine capacity earlier. In current scenario, where there is huge demand for diesel cars, there is a downside risk as well. Last week, the union government had agreed in principle to deregulate diesel prices. If the proposal goes through, then both petrol and diesel prices would be linked with the market and oil marketing companies (OMCs) would be able to decide the prices. Based on the current prices of crude oil, OMCs require the prices of petrol and diesel to be increased by Rs8 per litre and Rs15 a litre, respectively.

If at all the diesel prices are deregulated then the cost of ownership of a vehicle would be more or less on par with petrol cars. In such case, it would be difficult for any automaker to take firm call on whether to focus on petrol vehicles or diesel ones. This also is the dilemma, Maruti Suzuki must be facing. However, it should be noted that the company is paying big price for not thinking about future. While there is huge demand for diesel cars, the company cannot produce enough and what it is producing (petrol cars), it cannot sell without discounts.

"We expect demand for petrol vehicles to remain subdued in FY12-13 thus leading to higher overall discounts compared with last year and additional promotional and incentive schemes to drive sales. We continue to have concerns with un-hedged currency exposure beyond first half of FY13 and demand polarity towards diesel vehicles," added Emkay Global.

Maruti Suzuki closed Monday 2% down to Rs1,369 on the Bombay Stock Exchange, while the benchmark Sensex ended marginally up at 17,318.



Ratanlal Purohit

4 years ago

The Maruti has the Technolgy to make Electrical Variants. Government should remove duty on Green. Renewable Energy Cars on Fuel Cell, (Hydrogen), Solar or Hybrid are the Future. Forget FOSSILS. GO GREEN. MARUTI SHOULD NOT SIT ON ITS LAURELS OR FISCAL VAGARIES.


4 years ago



4 years ago

The problem at Maruti Suzuki is that:-

1) They are still stuck with royalty issues, literally keeping the Japanese parent alive by drawing whatever they can from India.

2) The Gurgaon location does not work anymore as a global manufacturing unit, being located far from a sea-port.

3) Apart from the Swift/D'Zire range of cars, none of the other models are pulling their weight anymore.

4) The quality itself is suffering, and the cars increasingly appear to be like a collection of lowest bids.

5) The company appears to have too much focus on variety, which confuses the customer and overloads the dealers.

6) Their much vaunted lower cost of operation, especially spare parts, is not true anymore either.

Too much time and effort being wasted on non-core activities, like car rallies and brand building, while neglecting the actual customers, is beginning to tell. When, for example, was the last free pre-summer service camp from Maruti?

To many, Maruti reminds them of the fading days of Premier Auto - living and eating off their reputations. That is not possible. Maruti have become a flabby company, and need to reinvent their products, not their brand. Currently, top management from Japan is invisible, and top management from India is not relevant, while sycophancy triumphs. Sure markers of a quick rattle before finally collapsing. Mishandling of the labour issue will also have its own retaliations someday or the other.

Sad. They shall be missed. Unless they shake up, it will all be only about the value of the real estate in Gurgaon, soon.

Humbly submitted/VM


Ratanlal Purohit

In Reply to malq 4 years ago

Shri Malik has done good analysis. Only one point left. Maruti is on their Way Out but Who is the New ONE REPLACING THEM?
Request Veereshji to HELP.


In Reply to malq 4 years ago

Thanks Veereshji for your valuable additions. :-)

Telenor to write-down $682 million India exposure

“As a precautionary measure, Telenor ASA has decided to write down the remaining fixed and intangible assets in India amounting to NOK 3.9 billion (NOK 2.6 billion after non-controlling interests),” Telenor informed the Oslo Stock Exchange

Oslo: Norwegian telecom company Telenor on Monday said it will write down $682 million (Norwegian Krone—NOK 3.9 billion) to remove accounting exposure to India due to uncertain business environment in the sector, reports PTI.

The company said its decision follows spectrum auction recommendations by sectoral regulator TRAI after the Supreme Court had cancelled 122 telecom licences, including 22 of the Norwegian firm, in the 2G spectrum case.

“As a precautionary measure, Telenor ASA has decided to write down the remaining fixed and intangible assets in India amounting to NOK 3.9 billion (NOK 2.6 billion after non-controlling interests),” Telenor informed Oslo Stock Exchange.

The write down will be included in Telenor’s results for the first quarter 2012, to be presented on 8 May 2012, the statement said.

“After the write down, Telenor has no further accounting exposure related to India as of 31 March 2012.” it added.

Telenor holds around 67% stake in joint venture Uninor, and rest of it is owned by realty firm Unitech.

The Supreme Court has asked the government to conduct fresh auction for the spectrum by 31 August 2012 and licences of the company will remain valid till 7 September 2012.

Telenor said Uninor’s operational performance in India during the first quarter 2012 has developed according to plan.

“Following the Supreme Court’s ruling in February to cancel Uninor’s licences and the recent recommendation from the Telecom Regulatory Authority of India (TRAI) regarding the 2G licence re-auction, the uncertainty has increased significantly,” Telenor statement to OSE said.

It further said, “If the recommendation from TRAI in its current form should be approved by the Department of Telecommunications (DoT), it will be almost impossible to participate in the auction for Telenor.”


Government allows further export of cotton

“A decision has been taken to remove suspension of cotton exports registration. Registration of cotton exports will be allowed by the government,” commerce and textiles minister Anand Sharma told reporters

New Delhi: The government on decided to allow further cotton exports in 2011-12 marketing year ending September as production estimates have been revised upwards, reports PTI.

“A decision has been taken to remove suspension of cotton exports registration. Registration of cotton exports will be allowed by the government,” commerce and textiles minister Anand Sharma told reporters after meeting agriculture minister Sharad Pawar.

Last month, the government had lifted the ban on exports but decided not to issue fresh registration of certificates (RCs). It only allowed shipments for which RCs were already issued before the ban was imposed on 5 March 2012.

Congress MPs from Gujarat led by Ahmed Patel, political secretary to UPA chairperson Sonia Gandhi, and state pradesh congress chief Arjun Modhwadia recently met prime minister Manmohan Singh, finance minister Pranab Mukherjee and Sharma and sought the removal of restrictions on cotton exports.

The decision also comes against the backdrop of Mr Pawar writing to the prime minister objecting to the government's export policies towards certain farm items like cotton, sugar and milk.

Mr Sharma said there would not be any quantitative restrictions on registration for exports, but the group of ministers (GoM) would review the situation in two-three weeks.

“We have accepted agriculture ministry’s data on cotton production. Based on revised estimates of the Cotton Advisory Board (CAB) as well as the agriculture ministry, we have decided to remove suspension on registration of cotton exports,” he added.

Earlier this month, the Cotton Advisory Board had revised production estimates upwards to 347 lakh bales from 345 lakh bales for the current season. It has also revised domestic consumption estimates downwards to about 250 lakh bales from 260 lakh bales earlier.

The agriculture ministry has revised upwards cotton output to 352 lakh bales from 340.8 lakh bales.

Before the ban was imposed, the government had issued RCs for about 130 lakh bales.


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