Maruti plans to reduce import bill by three-fourths by 2015

Maruti plans to reduce import bill by three-fourths by 2015

New Delhi: India’s largest car maker Maruti Suzuki India Ltd aims to reduce its import bill by three-fourths in the next three years, seeking to protect itself against unfavourable exchange-rate fluctuations that could dent profitability, according to five people familiar with the plan.

The rupee’s sharp depreciation over the past year has made imports more expensive for manufacturers who rely on components made overseas.

Content sourced from local vendors makes up as much as 96% of Maruti cars. But at least 30% of the content is imported by the vendors, who are compensated by Maruti for the adverse impact of any currency fluctuations.

Half of Maruti’s foreign currency exposure is yen-denominated. It has exposure to the yen on account of direct imports of parts and raw materials from Japan, royalty paid to parent Suzuki Motor Corp. and imports by its vendors.

The company plans to gradually end the practice of compensating vendors for forex losses.

“The focus is on more and more localization," said a top Maruti official. “We are setting up targets for localization and in order to achieve that the suppliers will have to invest at their plants to manufacture the components which they import. We would reduce compensation for adverse forex movement gradually, even if vendor is not able to localize."

The company’s move to reduce its import bill comes after shareholders at its annual general meeting last month criticized the management for declining profit. Maruti Suzuki’s first quarter net profit fell 23% from a year earlier to 424 crore in the three months ended 30 June.

“The whole process will be monitored by the board and the step is considered as top priority for the company, said another company official familiar with the development.

Maruti’s chief financial officer Ajay Seth did not respond to phone calls. A text message sent on his mobile remained unanswered.

I.V. Rao, chief operating officer (engineering), said that reducing imports has always been a focus for the company because of uncertain currency movements.

“While import is very low but we suffer at our vendors end," said Rao. “So, we encourage them for more localization in order to stay profitable."

JBM Auto Ltd, one of Maruti’s leading suppliers, has already started investing towards localization.

“We have invested around 200 crore for transfer press line and automation," said Nishant Arya, executive director of JBM Auto. “The investment is through a joint venture with Maruti."

Maruti had picked up minor stakes in auto component companies in the late 1980s to support the then nascent vendor base in the country.

A report by Mumbai-based brokerage firm Motilal Oswal Securities Ltd said that Maruti’s move to reduce imports will be coupled with a greater focus on boosting exports.

“By 15 March, it is targeting to reduce imports from $2.5 billion in FY12 to $1.6 billion, while increasing exports from $0.8 billion to $1.2 billion. As a result, net forex exposure is expected to come down from $1.7 billion in FY12 to $0.4 billion," wrote Jinesh Gandhi and Mansi Verma, analysts at Motilal Oswal.

“The key components targeted for localization are diesel engine and transmission components. Led by higher exports and increased localization, margins are expected to rise to 10% by FY15/16, excluding the 150 basis points positive impact of SPIL merger."

In April, parent Suzuki Motor Corp. merged its diesel engine plant Suzuki Powertrain India Ltd (SPIL) with Maruti Suzuki. The merger increased Suzuki’s stake in Maruti by 2 percentage points to 56.2%. Suzuki Powertrain was a 30:70 joint venture between Maruti and Suzuki Motor. Another company official said that it will take at least two months to increase production at the Manesar plant to optimum levels. The plant was shut for a month after militant workers went on the rampage killing one executive and injuring almost 100.

“We are producing around 550 cars now," said Rao of Maruti. “We want to be in place ahead of the festive season and that may take around two months’ time. We are facing some hurdles in hiring new people as we want to be very careful about their background."

Prior to the violence, Maruti was producing at least 1,700 cars per day at the plant, which included the A-star, Ritz, SX4 and Dzire models. The company suffered a revenue loss of 1,500 crore during the period.

Maruti has an order backlog of 140,000 diesel cars, including 30,000 Ertiga. Customers have to wait an average of 4-5 months to get delivery of a Dzire or Ertiga car after they have placed an order.

The waiting period is three months for the Swift model, according to the Motilal Oswal report.

Shares of Maruti rose 0.15% to close at 1,174.45 on BSE, while the benchmark Sensex shed 0.73%.