Maruti may have to up prices to meet higher wage bill

Maruti Suzuki India’s Manesar troubles could have a direct bearing on car buyers since analysts expect the company’s rising wage bill to result in increased car prices. After it reopened on Tuesday the factory which produces its best selling model Swift, besides the Dzire, A-Star and SX4 models, the company is planning to retain only a fifth of its workforce on contract. It has already sacked 500 regular employees and is expected to refuse employment to another 500 contractual workers once the process for regularising them begins on 2 September.

So when 80% of the Manesar workforce of around 3,400 workers would be made permanent, obviously Maruti’s wage bill will climb. Also, an increment is due at Manesar since wage negotiations had broken down after a deadly riot broke out at the plant on 18 July, which led to a month-long lockout. Severance pay to the permanent workers - though not significant - will also add to the company’s costs.

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[caption id=“attachment_425914” align=“alignleft” width=“380”]  So when 80% of the Manesar workforce of around 3,400 workers would be made permanent, obviously Maruti’s wage bill will climb. Reuters[/caption]

“We believe that the rise in costs due to hiring of permanent workers in place of contractual workers will be passed on to consumers,” Umesh Karne and Manashwi Banerjee of BRICS Securities said in a report on Tuesday.

Surjit Arora, institutional analyst with Prabhudas Liladhar said Maruti’s staff costs could rise 20-30 basis points but the company may pass on only a part of this increase to consumers.

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“Typically, staff costs are about 2.2% of Maruti’s topline and this might rise to 2.4%. I Expect any price increase to happen in its diesel models, i.e. Swift, Dzire, Ertiga, but not immediately. This will happen only when the plant is ramped up fully.”

He said there is little possibility of an increase in petrol car prices since their sales are already sluggish.

Nomura’s Kapil Singh and Nishit Jalan said in a note to clients that though Maruti has begun production with just 300 workers on the reopening day and is targeting only 150 cars initially, “production will increase gradually as the company hires more workers, in our view”.

“If everything goes smoothly, we believe the company may take another month to achieve full production. In our view, the company may be able to largely make up for lower production later on during the year,” the note said.

So the first day after lockout was lifted, Maruti made only 1 in 10 cars this plant churns out normally. Chairman R C Bhargava has indicated that the speed with which ramp-up to full capacity happens will depend on assessment of the situation at Manesar on a daily basis.

The company says the 500 permanent workers who have been sacked could prove a threat to it and it also anticipates trouble from politically affiliated labour unions which are threatening to take Maruti to court over mass sackings.

PL’s Arora said that he is sticking to his earlier volume growth forecast of 6.5% year on year at 1.2 million units for this fiscal despite the happenings at Manesar. “I will stick to this unless there is any incident of fresh violence or if unions’ actions disrupt production. If production halts or rampup does not happen within the next one-two months, then this target will need to be revised.”

Meanwhile, Suzuki Motor Co chairman Osamu Suzuki is expected to reach India this evening and meet workers of the Gurgaon plant tomorrow. The employee union at Gurgaon has objected to mass sacking at Manesar and this issue is quite likely to come up for discussion between Suzuki and the union members in their meeting tomorrow. Suzuki is also scheduled to meet Haryana Chief Minister Bhupinder Singh Hooda later this week.