Cost cutting, new launches: How Maruti attained record profits in Q4

New Delhi: Maruti Suzuki India has smashed all forecasts and reported the highest ever profit in its history for 2012-13. How did Maruti achieve this, in the very year when passenger vehicle market is down in the dumps and car makers are struggling with piling inventories?

By relentless focus on driving down costs, making further inroads into rural markets and by hedging currencies to lessen the impact of yen movement on its bottomline. In a small way, price increase in the last quarter of 2012-13 has also helped but Maruti’s biggest achievement able to do is bring down costs while simultaneously opening up new frontiers for car sales. Also, new launches like the Ertiga MPV have helped Maruti in not only attaining record profits but also in improving market share by a percentage point to 39.6% for the full year; its share stood at 42% in the March quarter.

Here’s what Maruti has done right:

1. It has attacked costs through multiple ways.

The company has continued with what it calls 1-1-1 programme, which means vendors, suppliers and others associated with it are encouraged to reduce the weight of each component that goes into making Maruti’s cars by one gram. Alongside, design changes have been made in the cars to generate savings. And a programme to reduce imports at the vendors’ end as well as overall increase in product localisation has been implemented. Net result? the material costs as percentage of net sales reduced to 77.9% in the fourth quarter of FY13 against 81.3% in a year ago period.

“So we were able to reduce costs effectively by 3.4% year on year. Of this, we managed 1% through price increase in January but the remaining 2.4% was all through extensive cost management,” Chief Financial Officer Ajay Seth said.

2. Identifying niche segments and focused marketing

Maruti has always been looking for niche segments which are amenable to buying cars even when the overall market is down. It has identified as many as 300 such segments now where it manages to sell over 8,000 cars every month. In the past, these segments have included government employees, school teachers, doctors etc. Such focused marketing helps increase sales even when the overall market is down.

3. It has made deeper inroads into the rural market too

Rural sales now account for 28% or more than a fourth of its total sales. Almost 3% of its sales now come from villages which have less than 100 households. This requires dedicated selling in the hinterland. While the overall growth for Maruti was 4.4% last fiscal, sales in rural areas were up 15%!

4. The company was helped significantly by weakening of the Japanese yen in Q4. The yen was 13 percent weaker against the dollar on March 31 compared with the same date a year earlier. This helped Maruti post record high profits in the last quarter of 2012-13. On its part, Maruti continues to reduce its reliance on expensive Japanese imports and hedging against the yen would be doubled to 60% against 30% now in the next few months to further insulate the company from volatile currency movements.

5. Reduction in discounts

Despite a widespread slump in the passenger vehicle market, Maruti was not only able to increase prices by about 1%, it also managed to reduce discounts on petrol cars in the March quarter. The average discounts reduced from Rs 12,000 to Rs 10,000, year on year, in March quarter.

So will the good run continue?

Maruti has gone ahead as per plans to expand facilities, both in Gurgaon and in Gujarat. Outgoing MD Shinzo Nakanishi has said long-term potential of the Indian market remains strong so there is no need to pull back on planned expansion. This, despite capacity utilisation in 2012-13 remaining at just about 80%.

New, aggressive car companies are certainly not going to let Maruti remain complacent. It managed to retain about 40% share of the passenger vehicle market last fiscal but going forward, it will have many competitors snapping at its heels. The trick is to not only continue with sales and marketing initiatives but to also have a robust product pipeline.