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Buoyed by improved sentiment in domestic automobile market, Maruti Suzuki, the country's largest car maker, has scaled up its projection for growth in cars sales this financial year.
"We will surely have a double-digit growth rate this year. We had not expected more than seven or eight per cent growth till the general elections, but our sales have grown at an average 16 per cent in the past five months. I will, however, not like to predict whether the rate for full year will be 12 per cent or 16 per cent," chairman R C Bhargava told Business Standard.
He also said Maruti would invest Rs 4,000 crore over the next five years in developing at least five new products at its India research & development (R&D) centre. In what might sound music to many shareholders' ears, local development will help the company lower its royalty payout - five per cent of net sales at present - to Japanese parent Suzuki Motor Corp. Bhargava pointed out: "Though new products will still have the platform and power trains from Suzuki Japan, the royalty we will pay for these cars will be lower than five per cent."
"We need five new models in the next five years. This will entail an investment of Rs 4,000 crore, including launch of models and providing vendors with tooling. The first model with significant Indian content will be a compact sports utility vehicle that will come in 2016," said Bhargava. Also, the company's cash surplus, currently at over Rs 7,000 crore, will only increase, as it does not have to make any investment in the upcoming Gujarat plant. Suzuki Motor will invest Rs 18,500 crore in this facility to increase its capacity to three million units a year. "In the first phase, the investment will be Rs 3,000 crore for a capacity of 250,000 units per year. Subsequently, there will be an investment of Rs 2,500 crore in each unit added. For six units, the total investment will come to Rs 18,500 crore, plus some capital expenditure of Rs 2500 crore to Rs 3,000 crore on modernisation and replacement," Bhargava said. However, he added, the period in which the money would be invested would depend on market growth, which might change from year to year.
Bhargava said he did not believe the overall car market growth this year would be higher than the five-six per cent predicted earlier but agreed sales uptake would be across the board. "The growth is not across manufacturers. Some of Maruti's new launches helped it grow its sales. But, generally, customers are not willing to take risks; they are playing safe and moving to products that are established and trusted," he said.
On the proposal that Suzuki would develop a fully owned plant in Gujarat, the Maruti chairman said he had travelled to New York, Boston, Edinburg, Hong Kong, Mumbai and Chennai to meet minority shareholders and secure their support.
"Nobody has anything against the arrangement. But some investors are uncertain as they fear this might be too good to be true." But Bhargava remains confident that the minority shareholders will give him a green signal.
Asked if he had a contingency plan if the shareholders baulked the move, Bhargava said: "I do not think we need a contingency plan. It would be unusual and inexplicable if our proposal was considered not good for shareholders."
He clarified the decision to peg Maruti's royalty payment to the rupee, instead of the Japanese yen, was not taken under pressure from shareholders. "It would have happened in any case, with or without Gujarat. We had been discussing it with Suzuki for two years. Instead of six per cent of sales earlier, the royalty now will never exceed five per cent; that will bring in some stability."
However, many argue the move might still eventually benefit Suzuki, as the yen is depreciating against the rupee. And, shareholders have demanded that the royalty should come down as volumes go up. But Bhargava rejected that contention. "First, the yen, currently at 57 paise, will not come down to the 35 paise level of a few years ago. Second, we sign a licence agreement with Suzuki one-and-a-half years before a car is launched. How does one predict the volumes and adjust royalty accordingly?"
Bhargava also said Maruti would make an aggressive entry into the sports utility vehicle segment, with two products - one, to launched next year, would be priced below Rs 10 lakh. The company would also enter the light commercial vehicle space but plans to go slow, with launches in select markets.
On expanding the company's diesel engine capacIty, the chairman said Maruti had decided not to go for an expansion but it did not see a dramatic shift back to petrol, despite price differentiation between the two fuels coming down. "The diesel shift is not dramatic. It was 62 per cent at its peak, now it is 50.5 per cent. It had gone up from 32 per cent to 62 per cent very swiftly, but the fall has not been at the same rate." Bhargava also said that exports were not a priority area for his company.
