Maruti Suzuki expects spike in rural sales after a good monsoon prediction

Updated : June 20, 2018 01:04 AM IST

RC Bhargava said the depreciation of rupee specially against the yen, does have an adverse impact on company's margins and profits.

RC Bhargava dismissed reports that company is working towards the portfolio of hybrid and electric vehicles.

A good monsoon will further help in increasing demand in the rural areas, said RC Bhargava, Chairman, Maruti Suzuki.

Speaking to CNBC-TV18, he said the depreciation of rupee specially against the yen, does have an adverse impact on company's margins and profits.

Bhargava dismissed reports that company is working towards the portfolio of hybrid and electric vehicles.

Edited Excerpts:

I wanted to start by asking you about this big transport revolution that India will see after the Bharat Stage VI (BS-VI) norms get applicable. You are working towards the portfolio of hybrid and electric vehicles, what kind of capex do you envisage for your launch in 2020 and do we have any of the infrastructure in place yet?

No, we haven’t got the infrastructure as we know the charging infrastructure in the country is still very inadequate. Nobody has got any major programme to build infrastructure.

As far as the budget for launching electric car is concerned, that budget has not been made yet, because at the moment, we only have a budget for 2018-2019, we don’t even have the budget for 2019-2020, let alone 2020-2021. So I am afraid there is no budget or capex or anything planned for that.

The research work and the development work for electric cars is going on in Japan. So I assume that Suzuki and Toyota have some budget there, but there is no budget for it here as such.

Given the high import content, the lack of scale so far and the high battery costs as we have discussed in the past, do you think the cost of electric vehicles will be much more than the cost of internal combustion engines and by how much is Maruti sufficiently or rather will Maruti address this through joint ventures? You have signed up with Toshiba, Denso, Suzuki, will you be able to localise, bring down costs etc?

The major factor, which raises the cost of electric cars is the battery, and over the last six-seven years, battery costs have been coming down. The government of India’s policy towards electric cars has one major assumption in it which is that, the strength in the reduction of battery prices will continue over the next few years and battery costs will half of what they have been. Roughly today, battery cost is about $200 per kilowatt. That will half is the expectation. Many consultants have given that expectation also.

Whether it is going to happen or not, only time will tell because there is another school of thought who have done their own studies, who believe that this trend in the reduction of battery costs will not continue and that battery cost prices will not come down.

As far as we are concerned, we have to buy batteries from vendors. So we are very much dependent on what trend technology has in relation to batteries and what impact it will have on prices because at today’s prices, the problem we face is that the compact cars, which means cars which are below Rs 5 lakhs in price and below four meters in lengths, those cars will more than double in their price to the customer. That price is unlikely to be acceptable, except for a very small number of customers.

That would not go down well, right? Compact car prices doubling once they are in their electronic form, how is the company looking at perhaps bridging this gap, how would you prepare for the cost escalation and what should the consumer expect?

Our getting prepared for it doesn’t help, because ultimately the customer has to pay the money for the car and if the customer doesn’t pay for the car at that high price, our being prepared doesn’t help.

There is still not too much of clarity on the alliance that you have with the Toyota, so can you give us some more colour on the nature of this partnership and what we should perhaps expect in terms of tie-ups this year itself?

No, I don’t think beyond what was stated in the press note, there is any further information or material in this matter.

Also wanted to ask you about the rupee depreciation. It has depreciated quite a bit against the yen and it is a big risk for your earnings, 16% of your costs as a percentage of sales are in yen, can you tell us how much could this impact you in the quarters to come?

Yes, the depreciation of the rupee does add to cost and while some part of it's hedged because we have an export income also and exports earn more. But overall, the depreciation of rupee specially against the yen, does have an adverse impact on our margins and profits.

Exactly how much, I am not able to predict because that depends on – we have done a certain amount of hedging of the currencies and commodities. So overall, let us see what it comes out to but yes, it is a negative factor.

What about demand trends, do you see positive demand trends continue for the rest of 2018 because of monsoon etc and are you seeing more activity now in the urban markets versus the rural?

The demand for cars is very strong, especially for a few models and we have seen that impact in the sale of cars in the first two months of the year. That demand strength is going to sustain during the rest of this year, because a good monsoon will further help in increasing demand in the rural areas. It will also increase demand in urban areas, because the economy will do better on the back of a good monsoon. So these factors will be very positive.

The price of petrol and diesel had gone up a lot in the last two-three weeks. It has been coming down and nobody knows what is going to happen in the rest of the year. Customers more than anybody else are very worried on what it will cost them to run a car, but it doesn’t affect the demand of cars in a very major manner.

In that case, what would your sales outlook be for the current year, 2019 and also an update on the production capacity? You were looking to expedite the second phase of expansion at Gujarat, what is happening on that front?

This year, we will grow by 10% because Gujarat will give us the additional cost. The first plant will be running at full capacity. The second plant will get commissioned in the beginning of 2019 and Suzuki is working on the third plant and that is expected in the beginning of 2020.

So, these additional capacities will be added on to our production capacities in Haryana, plus the arrangement with Toyota will give us some extra cars because Toyota’s unutilised capacity will become available for producing cars for Maruti.

What about the industry as a whole in FY19? Overall are you expecting a positive number because some companies have been struggling and we have even seen degrowth in certain cases?

Industry in May has done quite well. There was a significant growth of industry in May. I think, the figure was around 12-14% or something like that. This year has not been so bad, but overall it's true that the growth of Maruti has been faster than the growth of the rest of the industry, but I think that is a phenomenon, which nobody can predict.

It depends very much on what kind of models different companies come out with, how those models are accepted by the buying public and those have an impact on how rapidly your sales grow or they don’t grow. So predicting the sales of different companies over the rest of the year, is something which very difficult to do.

Maruti Suzuki expects spike in rural sales after a good monsoon prediction

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