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Rediff.com  » Business » Who cares about EBITDA: Maruti

Who cares about EBITDA: Maruti

October 22, 2007 13:01 IST

Market leader Maruti Udyog is pulling away from others in the automobile sector, but the impact of this on its bottomline is yet to be tested.

Jagdish Khattar loves to be contrarian. When pondering options, his beady eyes acquire a glint as he wonders aloud how to go against prevailing wisdom. This often shows up in the way he runs Maruti Suzuki India -- that is what Maruti Udyog now calls itself -- the country's largest car maker.

For instance, you may see an unusually high number of lavender Zen Estilos in your city. If you like it, there is good news for you. The dealers will give it to you cheaper than any other colour. The payback is that the colour stands out in the melee of cars and enhances the brand's visibility.

A few weeks ago, a woman manager in Maruti said taking her car for servicing was a problem. She worked six days and had loads to do on Sundays. Currently, Maruti service stations are picking up 9,800 cars registered in women's names every month. The dealer is getting money that would have otherwise gone to a neighbourhood workshop. And Maruti is generating goodwill by word of mouth.

"Strategy kya hota hai (what is strategy)?" asks Khattar. "Someone raised a problem; we found a solution and established due process. In retrospect, people will call it strategy."

Call it by any name, the strategy is paying off. In most markets, the leader suffers the worst in a downturn -- as seen in General Motors' woes in the US not too long ago. In India, as rising interest rates have affected car sales, Maruti has surged ahead. The sales of its passenger cars grew 17.6 per cent in the first half of this financial year (April-September), pushing up the average industry growth to 13.1 per cent. Among its major rivals, Hyundai posted 1.1 per cent growth and Tata Motors, a 1.9 per cent decline. This has increased Maruti's lead at the top and shored up its market share, already a formidable 52.7 per cent in April-September 2006, to 54.8 per cent.

For the first time, Maruti sold more vehicles in India in April-September than Suzuki, its 54 per cent owner, sold in Japan. That is nice topping for a half-year that began ominously for the industry with rising interest rates and slowing sales. At the outset, Khattar launched a campaign to beat the blues. He held parleys with dealers and vendors, often from morning till night, until they came around. In the last quarter, Maruti spent 60 per cent more on marketing and promotions.

"Quite honestly, this is something we have rarely come across. Good times in an industry's lifecycle make everybody look good. But in the car market, Maruti's showstealer of a performance in an otherwise bleak, tough market, is the stuff case studies are made of," gushes Mumbai-based brokerage house First Global. That case study will be like any other, thanks to the strategy adopted by Khattar, BA (Hons) History, LLB. The closest he got to classroom management teaching was when he toyed with the idea a few times.

About 11 per cent -- 36,000 units -- of Maruti's sales in the first half came from referrals by employees, dealers, vendors and schemes for village panchayats. The Wheels of India scheme for state government employees, First Class Offer for railway employees and Power Deal for NTPC also contributed.

When Khattar first went to vendors with the referral scheme, he said they suffer if Maruti's factory ran at below capacity. Maruti was providing finance at 8.5 per cent, much lower than the market rate of 13 per cent. All that the vendor had to do was sell the cars to its employees, which would also help it fight attrition.

The dealers are anyway beholden to Maruti because the company, when it raises prices, lets them keep the additional money earned from stock already with them. When prices are cut, dealers are compensated for the loss on stock. (The practice had once been criticised severely by old-time industry stalwarts as a tool to spoil dealers.)

The referral schemes are not novel. Tata Motors started customer referral as far back as 1992 for its trucks business. Hyundai started the Tulip Club for women, but it did not last. "Khattar has the bandwidth and resources (read volumes and manpower) to take these things forward," says a rival. Now, the rivals appear ready to give the ultimate tribute to Maruti by following in its tracks. Reports say the Indian arms of Honda, General Motors and Ford are into referrals.

Maruti has been helped by the fact that all its launches in the last and current financial years have been successful: the souped-up Wagon R and its LPG twin, Zen Estilo, the diesel Swift and mid-size sedan SX4. Four good launches in succession are the stuff of CEO dreams. More so in this case, because SX4 has taken over from Baleno and Esteem, both on their way out. The diesel Swift has given a boost to its already successful petrol sibling. And Zen Estilo has revived an old brand, Zen, which had been the segment leader for many years.

"Zen Estilo's launch was the finest piece of automotive marketing in the last couple of years. Using a Wagon R platform and bringing back the Zen name on the re-skinned Wagon R was an absolutely sensational idea," says BVR Subbu, who, first as the sales and marketing head and later president of Hyundai, fought many a battle with Khattar but is known to have remained friends with him. In contrast, Hyundai, which Subbu left last year, chose not to revive the Accent brand when launching Verna.

Maruti's successful launches tell another story. Most of the growth has come from them. Its mature models are not bringing home sterling report cards. In the first six months, SX4/Baleno sales grew 208 per cent, Swift sales 41 per cent, Zen 254 per cent and Wagon R nearly 20 per cent. But Maruti 800 sales declined 14.3 per cent and Alto's grew only 2.5 per cent.

However, the rival who points this out is quick to add: "You can't hold that against Maruti since new models have held it in good stead in a difficult market. They also show good planning since product launches take up to three years to launch. The only thing is that growth has to be seen in perspective." The perspective is that old, highly-localised and depreciated models make more money.

An industry analyst says the new models have merely re-distributed sales among models. People buying Zen Estilo would have last year bought Wagon R or Alto. "Growth has come not because the models are new but because they are successful. If Maruti had launched three models like Versa (remember the flop endorsed by the Bachchans?), it would have suffered."

After all, not all new models are doing well. While SX4 sales have been steady, those of Mahindra-Renault's Logan, launched at the same time, declined sequentially in August and September. There is no discount on SX4 and Swift. General Motors India has announced a Rs 53,000 discount on Spark, which hit the market a month before SX4, to mark 100 years of its parent.

Still, Maruti needs to be careful even as it goes all out to push growth. Traded on stock exchanges, it has to face shareholders every quarter. Khattar's response is contrarian: "My first job is to sell cars, not improve the EBITDA margin to meet analyst expectations. If you keep selling, the EBITDA will rise."

Suveen K Sinha in Mumbai
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