BackMaruti Suzuki looks to cut overhead costs as demand falls
Maruti’s non-operational overhead expenses rose to `490 crore at the end of 31 March from `471 crore last year
Premium(Ramesh Pathania/Mint)
New Delhi: Maruti Suzuki India Ltd is looking at ways to cut discretionary costs, including marketing, promotions and travel, as a slump in demand has crimped profit at the nation’s biggest car maker.
“These are tough times. I have asked my team to cut down on overheads, which gets higher year after year," managing director and chief executive Shinzo Nakanishi said in an interview on Monday night. “I will be happy if they manage to keep the overheads cost at the current levels."
Weak consumer sentiments and slowing economic growth have affected car sales in India. Car sales growth at Maruti stood at 1.64% in the 11 months ended 28 February as high interest rates on car loans and increasing fuel prices discouraged buyers.
Rival Tata Motors Ltd said car sales declined 37.4% in the period and South Korea’s Hyundai Motor Co.’s local unit posted flat growth. Overall passenger car sales fell 5% to 2.4 million units in the period.
Maruti also needs to reduce inventories, he said, adding that the company is in the process of finalizing its budget for the year starting 1 April.
“Normally overheads go up when we have a lot of activities (marketing and sales promotions). These include travelling of people and other such expenses. My team is expected to find out a way to control them," Nakanishi said.
Overhead expenses include spending on travel, communications, consultancy and director payments, audit fees and IT support spending, among others.
Maruti’s non-operational overhead expenses rose to ₹ 490 crore at the end of 31 March 2012 from ₹ 471 crore at the end of the previous year, according to Mahantesh Sabarad, an analyst at Fortune Equity Brokers (India) Ltd.
“It is further expected to go up to ₹ 500 crore this fiscal," he added. “These are not strictly linked to operational expenses, which are already high. So, there can be potential savings coming from here if they exercise cost restraint."
Employee and raw material costs have also risen significantly in the last few years. Employee expenses went up to ₹ 241.23 crore at the end of 31 December from ₹ 161 crore at the end of the June quarter in 2010-11. Raw material costs have increased to ₹ 8,376 crore from ₹ 6,078 crore in the same period.
Maruti has reported a decline in net profit in the first two quarters of the current fiscal before posting a 143% growth in net profit in the three months ended 31 December because of a low base.
The company cannot risk an inventory pile-up and will look at ways to rein that in, Nakanishi said.
“I would like to bring down the stock in the range of 90,000 to 100,000. This, however, would not mean that we will incur losses (by selling on discounts). Rather, we will be saving on costs in terms of interest rates, etc.," he said. “If needed, we may go for another production closure for petrol cars."
On Saturday, Maruti stopped its petrol car assembly line at its Gurgaon plant for a day to reduce inventories.
Another company official who declined to be identified said that the current stock with dealers and in transit is close to 120,000 units. “We do not have a problem with diesel cars but we need to check the production of petrol cars," the official said. The company produces at least 3,500 petrol cars a day at its Gurgaon plant.
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