Biggest Carmaker Shifts Focus to Shield Margins: Corporate India
Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker by volume, is tapping the country’s rural market to boost sales and shield its best profit margin since 2011.
Maruti, which almost doubled net income in the quarter ended March 31, plans to increase sales in rural areas of the world’s second-most populous nation after deliveries in small towns and villages exceeded those in large cities, said Mayank Pareek the company’s sales head. The New Delhi-based company, which has customers in 50,000 of the nation’s 650,000 villages, will raise marketing expenditure to attract clients in the countryside, he said.
The unit of Suzuki Motor Corp. (7269) is betting better rural road connections will convince first time buyers to purchase its Alto, WagonR and DZire models as Prime Minister Manmohan Singh prepares to spend $146 billion on transport infrastructure. Sales in India’s countryside will depend on harvests following the annual monsoon rains that help irrigate 55 percent of the country’s farm land, according to Deepesh Rathore, managing director at IHS Automotive in India.
“In villages, customers come with bags of cash and select a car and want it there and then,” Pareek said in an interview. “‘What we’ve done so far is just the tip of the iceberg, and we can really penetrate more and do wonderful work.”
Deliveries in rural areas accounted for 28 percent of Maruti’s sales in the year ended March 31, from 4 percent three years ago, Pareek said. Selling in small towns jumped 15 percent in the period even as the total business rose 4.4 percent, he said.
Net income in the three months ended March 31 rose to 12.4 billion rupees ($228 million) from 6.4 billion rupees as a weaker yen reduced the cost of components and sales of its Ertiga minivan and revamped Swift DZire increased even as nationwide car sales fell 6.7 percent, the most in 12 years.
Maruti’s shares have risen 12 percent this year, making it the best performing on the S&P BSE Auto Index. The stock surged 5.2 percent to 1,673.15 rupees on April 26.
The company’s marketshare increased by 1 percentage point to 39 percent in the year ended March 31. It had 87 percent of the market in 1998. Earnings margin before interest, taxes, depreciation and amortization widened to 9.82 percent, the highest since 2011.
Maruti, named after the son of the wind god in Hindu mythology, has 1,100 dealerships in India, more than three times those of second-placed Hyundai Motor Co. Half of Maruti’s showrooms are in rural areas.
“It’s a good strategy for Maruti to focus on rural markets as incomes in rural areas are still growing,” said Juergen Maier, a Vienna-based fund manager at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets. “Maruti has the volumes to justify having dealerships in small towns, something that Toyota or even Hyundai wouldn’t be able to do.”
Automakers from Isuzu Motors Ltd. (7202) to Mahindra & Mahindra Ltd. (MM) are seeking to benefit on growth in India’s villages after per-capita spending by the nation’s villagers grew faster than that of urban dwellers for the first time in two and a half decades in the two years to March 31, 2012, according to Standard & Poor’s Indian unit Crisil Ltd.
Rural spending was 12.9 trillion rupees in the period, compared with 10.4 trillion rupees in urban areas, Crisil said. PricewaterhouseCoopers forecasts India will have 570 million middle class consumers by 2021, that’s more than the combined population of the U.S. and Indonesia.
Still, farm incomes will depend on the monsoon. More than 235 million farmers count on rains for irrigating crops such as rice and cotton. India’s economic growth was 5 percent in the fiscal year ended March 2013, the slowest pace since 2003, partly because of a decline in farm output caused by a below- average monsoon last year and a moderation in investment, the statistics agency estimates.
“Rural incomes depend on the monsoon and farmers income, and if in a particular year the monsoon is not good or farm output drips, then sales too will fall,” said Umesh Karne, an analyst at Brics Securities Ltd. in Mumbai. “Those factors aren’t in anybody’s hands and are hard to predict.”
India may get above-average rainfall for a third time in four years in 2013, Earth Sciences Minister S. Jaipal Reddy told reporters in New Delhi on April 26. More grains will help ease inflation and lift sales of everything from gold to tractors.
“Monsoon plays an important psychological factor for rural buyers,” said IHS’ Rathore.
Sales at Jagmohan Motors in Bhiwani, a small town in the northern state of Haryana, are down this month as customers wait to harvest, said manager Sanjeev Kumar. The most popular is the Alto, he said. The model, which starts at 244,000 rupees in New Delhi, is the company’s least expensive hatchback after the Maruti 800. Maruti has been producing the 800 since 1983.
Government programs such as the Pradhan Mantri Gram Sadak Yojna developed to build and upgrade village roads coupled with rising incomes has helped Maruti, said Pareek.
Under the state program 212,085 kilometers of new village roads have been built and 137,543 kilometers have been upgraded in the past 12 years, according to government data.
“With better road connectivity, people are buying small cars for their personal use,” said Pareek. “Rise in rural prosperity is helping, as people have similar aspirations to those in the cities.”
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