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Rediff.com  » Business » Car sales have taken a back seat, tough year ahead: Maruti

Car sales have taken a back seat, tough year ahead: Maruti

April 23, 2014 12:05 IST

Car sales have taken a back seat, tough year ahead: Maruti

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Surajeet Das Gupta

A few days after Maruti Suzuki’s sales figures showed flat growth in 2013-14, Chairman R C Bhargava reckons the year ahead is going to be difficult for the car sector. Excerpts from an interview with  Surajeet Das Gupta

How do you see car sales in FY15?  

Our sales have been at the same level as the previous year. Petrol cars went up and made up for the decline in diesel cars. Rural sales went up 16 per cent and made up for  slow urban sales. Our exports fell because new regulations impacted sales in Algeria.

We do not see any evidence that things will change significantly. We do not see growth of more than three-four per cent. If it is six-seven per cent, we will be very lucky.  

The main problem is that the consumer’s purchasing power has been eroded. Fuel prices have gone up by over Rs 20 a litre in two years. Taking an average use of a car of 1,000 km (a month), the extra burden is Rs 1,300. 

The cost of living has gone up and salaries are not growing as fast as inflation.

The new government has to bring back purchasing power. While industry (sales) declined, we maintained our sales. That is why we gained three per cent market share last year. But that is not enough. The whole market has to grow. We cannot continue like this.

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Photographs: Courtesy,Maruti

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Will this affect your investment plans?  

No, we will continue to invest in product development. The launch of a new car always pushes sales. Last year, we did not have any new model, this year we have three. See the Celerio, it got a good response.  

In terms of new capacity, we are on track with the Gujarat plant. We have extra capacity of 300,000 cars but if the new government can bring growth back and we again grow at 10-12 per cent, we must be prepared.

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Image: Maruti Celerio
Photographs: Courtesy, Maruti

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What made you concede to minority shareholders on the Gujarat plant?

Our fundamental proposition that Suzuki will set up a 100 per cent subsidiary remains unchanged.

That it will undertake contract manufacturing for Maruti remains unchanged. The only difference is that earlier Suzuki was to invest Rs 3,000 crore (Rs 300 billion) as equity in the new plant.

Now it might have to invest around Rs 6,000 crore (rs 600 billion) as equity, depending on how much will accrue from depreciation.  

This will Increase Maruti’s profit. However, this does not mean that in the earlier proposal, shareholders were not making profit.

If they are making x profit now, they would have made 60 per cent of x. So, there was no reason for Maruti’s shares to fall when the first proposal came in.

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Image: Maruti Ertiga.
Photographs: Courtesy, Maruti

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Car sales have taken a back seat, tough year ahead: Maruti

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Does the new proposal impact Suzuki?  

No, it will get higher a profit on its 56 per cent shareholding in Maruti, which it can consolidate in its accounts. It will also get a 56 per cent share of the interest income on the Rs 6,000 crore (Rs 600 billion) cash reserves of Maruti. 

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Image: A worker adjusts the windscreen wipers of a parked Alto car at a Maruti Suzuki stockyard.
Photographs: Amit Dave/Reuters

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Car sales have taken a back seat, tough year ahead: Maruti

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You have added a new condition that the Gujarat subsidiary has to be cleared by Maruti’s minority shareholders. Do you think they will?

 I have no doubt the minority shareholders will clear it. See how (Maruti’s) share has hit nearly Rs 2,000. What does it show?  

As a general principle, though, this clause in the Companies Act should be reconsidered.  

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Image: Maruti Suzuki Ertiga.
Photographs: Courtesy, Maruti

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Have you started the process of calling a shareholders’ meeting to clear the proposal?  

Not yet. We are planning a road show to meet all minority shareholders. They constitute 41 per cent of Maruti’s shareholders.  

Before that, two things need to be done. Suzuki Gujarat’s board has to approve the contract manufacturing agreement.  

A board meeting is expected in the next few days. Second, we have to have to get legal and tax opinion on transfer pricing, direct taxes etc.  

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Photographs: Yuya Shino/Reuters

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So, the process will take three-four months.  

July is a bad month, as quarterly results are due. As a rule, we do not meet investors at that time. So, not before August-September.

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Photographs: Reuters
Tags: 1

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Car sales have taken a back seat, tough year ahead: Maruti

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Analysts have attacked you for huge royalty payouts that are eating into Maruti’s profits. Will you look for a more transparent royalty regime?

There is always a exchange risk when buying technology. In 1982 when we started, we had looked at a formula of sharing the exchange risk between Suzuki and Maruti.

Within two years, the yen appreciated and Suzuki had to sell knocked-down kits below cost for eight years.  

Of course, Maruti would have been wiped out if it had to bear the entire exchange risk.  

But Suzuki is hesitant to take the risk as we are the buyers of technology. It is our currency that is depreciating, so why should they lose? We have had talks to find middle ground. The only thing I can ask of them is to please reduce the margins further.  

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Photographs: Amit Dave/Reuters

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But this seems a major concern for shareholders..  

Maruti is making higher returns on its equity than any other car company in India, irrespective of whatever royalty I pay. Why should the investor complain? You cannot look at every component of my business and ask questions.  

Someday, you will ask me why I pay higher wages!  

Look at the end result: a shareholder is better off buying Maruti shares. If you do not like the way I run the business, you can go elsewhere. I am not going to justify each component of my strategy.  

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Photographs: Mukesh Gupta/Reuters
Tags: Maruti , India

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Many say you succumbed to pressure from minority shareholders...

If I do not listen, they will say I am rigid. If I listen, you will say I succumbed to pressure. Whatever we do, we are in the wrong!

 

 


Photographs: Courtesy, Maruti
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