Maruti Suzuki's Q3 FY 2009/10 Profit More than Triples; Plans to Invest US$367.5 mil. in Capacity Expansion

Strong Financial Performance in Q3 FY 2009/10

The Indian subsidiary of Suzuki, Maruti Suzuki, has revealed its third-quarter financial results for fiscal year (FY) 2009/10, revealing a threefold increase in net profitability on the back of various vehicle market stimulus schemes globally and helped by a low base of comparison. For the three months ending 31 December 2009, the automaker's net profit increased by a significant 221.9% year-on-year (y/y) to 6.8 billion rupees (US$149 million), compared with just 2.1 billion rupees in the same period of 2008. Its operating profits also more than doubled to 75.0 billion rupees, from 46.3 billion rupees. The automaker sold 258,026 units during the quarter, split between 37.8% y/y growth in the domestic market to 218,910 units and a huge sales spike of 167% y/y to 39,116 units in export markets. In light of this, sales revenues were also up significantly, by 62.5% y/y to 73.3 billion rupees, in comparison with 45.1 billion rupees a year ago.

Maruti said in a statement that, "This has been a good quarter…Favorable conditions in the domestic market supported by the government's stimulus package and ease of automobile finance helped achieve good sales." It added that, "Commodity prices were favorable for a major part of the last quarter but started to harden in the last few weeks", stating that it remains "cautiously optimistic" about the market prospects during the final quarter of the FY. The Indian unit's chief financial officer (CFO), Ajay Seth, said: "We have to keep in mind [that] interest rates may raise [as the domestic economy recovers], and it is important that government incentive measures stay in place" to help keep the market buoyant.

Substantial Investment Plans to Raise Production Capacity

Maruti Suzuki's robust financial performance in the past couple of months has led the automaker to continue its long-term growth plans in the country. Maruti said in a press release that it will invest around 17 billion rupees (US$367.5 million) in expanding capacity at its Manesar plant by 250,000 units per annum (upa) to 550,000 upa, and it is likely to begin operations by April 2012. It added that this investment will increase Suzuki's annual production capacity to about 1 million cars in India. Seth further explained: "Maruti is fighting a capacity bottleneck…The increase in capacity augurs well for the company as there is a huge volume growth expected in the Indian car market over the coming few years." The automaker is expected to further ramp up capacity "if there is a need later".

Outlook and Implications

Although the global downturn in vehicle demand has pressurised many automakers, Maruti Suzuki has been better placed than some of its rivals thanks to its competitive model line-up and value-for-money pricing and the strength of the Indian vehicle market. The company has also taken full advantage of the various initiatives launched by governments across the globe since the beginning of 2009 as a result of its competitive array of lower-segment offerings. Besides these, several other factors contributed to Maruti's success story in the third quarter. These included several new model launches in global markets and the low base of comparison provided by the data for the final quarter of calendar year 2008. In export markets, the strong response to the A-Star, coupled with the scrappage incentives offered by various governments in Europe, have ensured spectacular growth for Maruti Suzuki in percentage terms. The A-Star is also the first product targeted at international markets from Maruti's Indian production base.

Maruti Suzuki has been taking steps to expand its capacity as part of its efforts to remain at the forefront of the domestic market and to cope with the expected increase in exports. It is already spending ¥20 billion (US$215.2 million) on construction of a new factory in Manesar (see India: 8 September 2009: Maruti Suzuki to Spend US$215 mil. on Plant Restructuring in India). This substantial investment will also go towards increasing capacity, revamping its model line-up, and setting up a research and development (R&D) centre this fiscal year. Despite its dominant position in India, Maruti Suzuki's ambitions as an automaker continue unabated. While it is reportedly increasing its domestic production capacity by up to 75% over the next five years (see India: 3 December 2009: Maruti to Raise Production by 75% over Next Five Years—Report), the company is also looking to expand in overseas markets through a combination of new models and its existing range. The plan for FY 2009/10 is to double the number of vehicles Maruti ships out of India to 130,000 units. The majority of the vehicles will be the A-Star, which is being sold in European markets as the Alto, with 70,000 units of this model due to be exported during the next 12 months.

However, despite these positive developments, headwinds remain for the automaker. These include:

• Pressure from Additional Investments and Increasing Manufacturing Costs: The additional investment plans come at a time when the automaker is having to upgrade its engines ahead of the introduction of Bharat Stage IV emission standards in April 2010 (see India: 17 April 2009: Maruti Planning to Invest 12 bil. Rupees to Upgrade Engines in Existing Models). Furthermore, metal prices are on an upward trajectory and may result in higher raw material costs during the fourth quarter of the FY.
• Expected Sluggish Growth in Export Markets: The automaker is likely to be hit by the fall in demand that is expected in those markets that have depended on government assistance over the past 12 months.
• Intense Competition from Global Rivals: Despite its future growth plans, Maruti will come under increasing pressure at home, with automakers such as General Motors (GM), Nissan, Honda, Toyota, and Volkswagen (VW) all set to launch new models aimed directly at Maruti's heartland, while local rival Tata will take increasing volumes with its ultra-low-cost Nano. It will be interesting to see whether Maruti can shrug off this competition and maintain its dominance of the local market.