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Maruti Suzuki shifts focus to shield margins

Maruti Suzuki is tapping the country’s rural market to boost sales and shield its best profit margin since 2011
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First Published: Mon, Apr 29 2013. 11 11 AM IST
Deliveries in rural areas accounted for 28% of Maruti’s sales in the year ended 31 March, from 4% three years ago. Photo: Ramesh Pathania/Mint
Deliveries in rural areas accounted for 28% of Maruti’s sales in the year ended 31 March, from 4% three years ago. Photo: Ramesh Pathania/Mint
Updated: Mon, Apr 29 2013. 12 47 PM IST
Mumbai/New Delhi: Maruti Suzuki India Ltd, the nation’s biggest car maker 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 31 March, 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 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. 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% 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.”
Ertiga, DZire
Deliveries in rural areas accounted for 28% of Maruti’s sales in the year ended 31 March, from 4% three years ago, Pareek said. Selling in small towns jumped 15% in the period even as the total business rose 4.4%, he said.
Net income in the three months ended 31 March rose to Rs.1,240 crore from Rs.640 crore as a weaker yen reduced the cost of components and sales of its Ertiga and revamped Swift DZire increased even as nationwide car sales fell 6.7%, the most in 12 years.
Maruti’s shares have risen 14% this year, making it the best performing on the BSE auto index. The stock gained as much as 1.9% to Rs.1,704.35, headed for its highest level since listing in July 2003, and traded 1.4% higher as of 9:42am on Monday.
The company’s market share increased by 1 percentage point to 39% in the year ended 31 March. It had 87% of the market in 1998. The earnings margin before interest, taxes, depreciation and amortization widened to 9.82%, the highest since 2011.
Maruti 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.
‘Good strategy’
“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 to Mahindra and Mahindra Ltd 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 31 March 2012, according to Crisil Ltd.
Monsoon rains
Rural spending was Rs.12.9 trillion in the period, compared with Rs.10.4 trillion 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 US 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% 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 26 April. More grains will help ease inflation and lift sales of everything from gold to tractors, reddy said.
Harvest wait
Monsoon plays an important psychological factor for rural buyers, said IHS’ Rathore.
Sales at Jagmohan Motors in Bhiwani, a small town in 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 Rs.2.44 lakh in New Delhi, is the company’s least expensive hatchback after the Maruti 800. Maruti has been producing the 800 since 1983.
Government programmes 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 programme, 212,085 km of new village roads have been built and 137,543 km 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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First Published: Mon, Apr 29 2013. 11 11 AM IST
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