Apr 30, 2012 04:05 PM IST | Source: CNBC-TV18

No great buoyancy in domestic market, says Maruti Suzuki

Maruti Suzuki has maintained its guidance of around 10% growth in the current fiscal year, but the India's top passenger car maker feels the domestic macro economic environment remains challenging for now.

Maruti Suzuki has maintained its guidance of around 10% growth in the current fiscal year, but the India's top passenger car maker feels the domestic macro economic environment remains challenging for now.

Maruti's CFO Ajay Seth told CNBC-TV18 there was no great buoyancy in the domestic market at present and interest rates and fuel prices would have to be watched through the year.

The company had on Saturday reported fourth quarter net profit of Rs 640 crore, down lower-than-expected 3% year-on-year, helped by rebound in sales volumes and higher other income.

Net sales for the three-month-period were up 17% year-on-year to Rs 11,486.4 crore.

Its EBITDA (earnings before interest, taxes, depreciation and amortization) margin was down 270bps year-on-year at 7.3% in Jan-March.

Seth said there was significant recovery in volumes and realizations in the fourth quarter, but margins were hit due to yen appreciation.

The company has currently hedged 40% of its annual forex exposure.

Below is the edited transcript of Seth's interview with CNBC-TV18. Also watch the accompanying video.

Q: There is some strife above the margins and the performance there. What happened on margins this quarter?

A: There was a significant recovery this quarter, sales also picked up. Our total sales were at 360,334 units, 5% higher than same period last year. There was significant improvement in both volumes and realization. Although we had challenges in this quarter in terms of adverse yen and dollar rupee movements, but in spite of that, overall we have been able to manage our focus on cost reduction initiatives, better realization and better mix of products. We have sequentially improved out EBITDA margins from 5.5% to 7.8% now.

Q: When do you think you would be able to get back to double digit margin growth? What are the steps that the company is taking to achieve that?

A: Our endeavor is to continue to work towards a double digit margin, but to give you a timeline is very difficult. Our actions internally are all aligned towards the same. We are doing all possible things to ensure that we continue to work towards margin improvement. For example, we have taken aggressive stance on commodity and exchange side this time. We have got 40% of our Forex covered for the year. We have taken major exposures on commodity covers to derisk ourselves.

On the other side, we have also been in a very focused manner working on cost reduction programs and localization programs with the vendors because we believe that ultimate solution to the big risk of exchange that we face is the localization program. If the volumes continue to show an uptake, we will also achieve some economies of scale further, so this will be positive.

But you also have to continue to watch markets now for the next few quarters because on the macro economic front we don't see a very rosy picture. We also need to watch how the interest rates and fuel prices pan out in the long run. If these factors continue to be favorable, then we might see some bounce back in the market. At the moment we don't see much buoyancy in the market. Hopefully, as we move forward we will see some bounce back in the market.

Q: What is the company’s exact hedging policy for both direct and indirect imports for the next couple of quarters?

A: We would be happy to hedge up to 50% of our yearly exposure. We have currently hedged about 40% of our yearly exposure. With every improvement in year end, we will continue to hedge and take it up to 50% and continue to be at 50% for the balance part of the year.

Q: FY12 was a difficult year for Maruti for various reasons. What is it that you are confident guiding to in terms of growth for this year for the company?

A: We have given a guidance of about 10% growth next year. This is more in line with what SIAM (Society of Indian Automobile Manufacturers) and what the industry is talking about. We think that is achievable.

Q: The markets also had a lingering concern with regards to royalty repayments and whether Maruti and Suzuki have had any renegotiation on that front. Can you just throw some light on that whether there has been any reworking of policy?

A: There is no renegotiation that is taking place with Suzuki on royalty because royalty is decided at the time when the model is launched. There is a license agreement which is signed and that license agreement is valid till the life of the model. Therefore, royalty will remain where it is. The only difference in royalty could be exchange rate variation that we are seeing, otherwise there is no change.

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