Maruti customers may defect if Manesar doesn't reopen in 15 days

New Delhi: Its early days but if analysts are to be believed, Maruti Suzuki India needs to restart production at the Manesar facility within the next fortnight or risk losing customers to other brands.

The company’s facility, which produces all its diesel cars, has been shut since 18 July after a riot broke out, resulting in many injuries to staff and the death of an HR manager. The company has given no new timeline by which it plans to open the plant, but is still assessing the damage and working with the Haryana government to nab culprits as the plant stays under indefinite lockout.

Umesh Karne and Manashwi Banerjee of BRICS Securities have said in their report on Monday morning that Maruti’s customers will stay loyal to the brand if the plant reopens in the next 10-15 days. “But if the lockout extends to beyond a month and more, then its customers are likely to shift. According to our channel checks, Maruti’s cars are in high demand (Waiting period for diesel cars is 2-3 months)”. These two analysts have estimated that since the lockout, Maruti has lost 1,500 units in sales and Rs 750 crore in revenue.

A story in The Times of India this morning speaks of Maruti planning to hire at least 1,000 new workers to start work at Manesar though it also emphasises that there is still no timeline for work to begin at this plant. The Manesar plant was working with about 900 permanent and 2,100 contract workers when the violence broke out on the 18th.

Kaushal Maroo of Emkay Global said this morning that as per the company management, the order book for Swift and Swift DZire is 55,000 and 62,000 units respectively, whereas for the Ertiga it is 32,000 units. The share of diesel cars in Maruti’s portfolio stood at 38 percent at the end of June in the domestic market. Every second car Maruti sold in the June quarter was diesel.

Analysts at Jefferies noted that Maruti has extraordinary pricingpower in the diesel segment as it has significantlystrengthened its position here in the last few quarters. Another interesting observation by these analysts was that other expensesper car (including staff costs) increased to Rs 54,000 (up 46 percent from the June quarter last year and 27 percent from the March quarter this year) - the highest ever.

Gaurant Dadwal of Nirmal Bang points out that the Manesar plant enters its 13th day of lockout today, “which will have a negative impact on the profitability of the company in 2QFY13 (current quarter) as the plant manufactures high-margin diesel cars such as Swift and DZire. Although it is too difficult for us to take a call on how long the lockout will last, we currently factor in overall production loss of 30,000 units in FY13E (2012-13 estimates).”

He said 2013-14 (FY14) will be a stable year for Maruti in terms of demand for cars, which is expected to pick up from the second half of the current fiscal. “Further, profitability is expected to improve in FY14 with additional diesel engine capacity expected to come on stream from the second half of the year.” So the bottomline for Maruti is to begin production at Manesar as quickly as possible to cut its losses.