Business Today Net Special

Maruti: Back In The Black

It's been the winning season at Maruti Udyog. For one, the market leader has grown its sales by 6 per cent, even as the overall market shrunk by as much. More importantly, the car major returned to profitability at the end of the first half of 2001. What did Managing Director Jagdish Khattar do right? And can he sustain the profits?

By Suveen K. Sinha

Maruti's Jagdish Khattar

At the beginning of this financial year, Maruti Udyog CEO Jagdish Khattar told his men that the percentage of defective vehicles that went from the assembly to the vehicle inspection floor was abysmally low at 35 per cent. It would do the company a lot of good if the percentage could be raised to 60 per cent. But that it would require an enormous amount effort.

At the end of the first six months (April-September 2001), the percentage had gone up to 80 per cent. As a result, the productivity of the company has shot up. "To quantify it, we are now producing the same number of vehicles in five shifts that we were producing in six shifts last financial year," says a spokesperson for the company.

Along with a 6 per cent surge in sales and a sharp rise in the local content of its new models (Baleno, Wagon R, Baleno Altura, and the Alto twins), the productivity jump has led to a financial turnaround for the company. Says CEO Jagdish Khattar: "We have closed the first six months with a net profit. We are back in black."

Khattar's joy is understandable. In the same period of the last financial year, Maruti had posted losses of about Rs 104 crore and ended the financial year (2000-01) with a net loss of Rs 269 crore on a turnover of Rs 9,253 crore. The losses, Maruti's first in its 18-year history, had eroded its net worth by 10 per cent to Rs 2,583.8 crore. The loss was big enough per se, but gargantuan when viewed against the profit of Rs 330 crore in 1999-2000 and Rs 522 crore in the year before.

It was widely expected that Maruti financials would be healthier this year than the last. First, last year's losses were expected. The Maruti board had been told over two years ago that the 2000-01 bottom line will look none-too-impressive even if the overall car market expanded 10 per cent. What happened instead was that the market has actually shrunk 7 per cent.

The lull in Maruti's activities in 1994-98, when equal shareholders, the Indian government and Suzuki Motor Co of Japan, fought for control, was followed by a frenzy of activity. Five models---Baleno, Wagon R, Baleno Altura and the Alto twins---were launched between November 1999 and September 2000. The total capital expenditure in the last three years thus touched Rs 3,000 crore. As a result, depreciation this fiscal is likely to stand at Rs 330 crore. The fall of the Japanese currency against the greenback last year hasn't helped matters. The low local content of the new models---Baleno's was 27 per cent at the time of its launch, while Wagon R had 65 per cent and the Alto models 71 per cent---means increase in Maruti's imports. If the yen falls, these imports take the hit twice as the payments are first converted from rupee into dollar and then into yen.

Maruti's bottomline suffered another hit because of the disappearance of 'other income'. The other income was the result of investments made with the cash accumulated in the carmaker's high profit years as well as the interest it earned on the booking amounts that customers deposited with dealers during the period that Maruti models enjoyed a waiting period. With the onset of competition, those queues of buyers have disappeared. Besides, a tough market has made sure that prices cannot be increased to even fully absorb the cost of last year's engine upgrades for the 800, Zen and Esteem.

This year was expected to be better because the single biggest 'loss-making' head of last financial year's profit and loss account, depreciation, was expected to fall to reasonable levels. However, what adds more punch to Maruti's first half performance is that depreciation has actually gone up as the company has invested an estimated Rs 550 crore in its next model, Versa, a multi-purpose vehicle. "Our depreciation has gone up by about 10 per cent in this period," says Khattar.

In addition, Maruti's sales have gone up to 170,269 units in April-September 2001 against 1,61,370 units in the same period last year. The market, in the same period, has shrunk 6 per cent, giving Maruti a 62 per cent share of the country's passenger car market.

However, the performance in the first six months doesn't guarantee a healthy balance sheet for the company at the end of the year. The market continues to shrink. September, traditionally a robust month since buyers cannot claim depreciation on the vehicles for the year after this month, the market shrunk by a whopping 20 per cent. This will force Maruti to keep the price of Versa low and allow it no leeway to increase the prices of other models.

And, with the war clouds hovering the world over, you never can predict how much consumers will buy.

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