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“When we talk about the euphoria of steel prices likely to come down, one must remember that about a year and a half back, CR steel was at about Rs 38/kg; it went up Rs 77-78 and this quarter was expected to be Rs 83-84. But with this news, probably the spot prices will come down maybe in that Rs 77-76 mark again. But when you compare it with Rs 38/kg, obviously it is quite high,” says Shashank Srivastava, Executive Director, India.

On the immediate benefit of excise duty cut in fuel and steel export duty on auto companies
The immediate benefit seems to be two; one is on the fuel prices. The cost of running cars comes down, especially for those consumers at the lower end of the spectrum who are very sensitive to the running cost. So that is a positive for Maruti Suzuki and for the industry in general because consumer sentiments for auto purchase is affected a lot by the running cost of the vehicles.

The second of course, is that steel prices are expected to come down, given some of the restrictions on export. That is a positive and as you know, material cost in any auto OEM is roughly about 75-77% of the cost structure and steel is a very important part of that material cost. Those two are immediate positives for the industry going forward.

As a percentage of the total raw material cost, how much is steel? If steel prices come down, what happens to this quarter’s margins?
I am not really sure about the exact percentage because our materials and finance guys are the best ones to answer that question. However, it is substantial and normally the steel contracts are done quarter wise and generally the effect of any decrease in spot prices of steel in contract prices happens with the lag of a quarter. So it is possible within a quarter but in subsequent quarters, one will see the full effect.

There is also an impact of demand or slowdown in demand which has happened in the auto companies. Are you likely to pass it on or are you likely to retain it?
We have not really come to any conclusion on that. However, the commodity prices generally speaking are very high. When we talk about the euphoria of steel prices likely to come down, one must remember that about a year and a half back, CR steel was at about Rs 38/kg; it went up Rs 77-78 and this quarter was expected to be Rs 83-84. But with this news, probably the spot prices will come down maybe in that Rs 77-76 mark again. But when you compare it with Rs 38/kg, obviously it is quite high. So profitability is still under pressure. There is no clear cut decision on the possible scenario.

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How sensitive is a car buyer about fuel prices? Do you think there is a direct correlation between fuel prices and demand?
No, we have not seen a direct correlation because obviously the overall impact on the demand is not just fuel prices, but a host of other things. In economic terms, car buying is a discretionary purchase and that means the disposable income matters a lot.
So, directionally if you are spending more on essential items like fuel or rent or clothes or food, then your disposable income comes down but remember that the effect of running cost is different across different segments of the industry as far as consumers are concerned. On the lower end, there would be much more elasticity in terms of the running cost as compared to on the higher end where the elasticity is low. So there is no general answer but directionally, running cost reduction boosts the sentiment across all segments. In fact, functionally it boosts demand in the lower end of the spectrum.

Are semiconductor issues finally getting sorted?
It is getting better but as we have said before, when we were announcing the annual results very recently, we said that we are seeing the problem continuing and we have said that this quarter also. There has been an effect because of the semiconductor non availability. Going forward, it is very difficult to predict when it will become 100% normal because it is quite complex but it does appear that it is getting a little better now.

Do you think that is a function of a shift in the Indian car buyer where the car buyer is moving up the value chain or is this a permanent shift? The last couple of quarters have been tough for the entry level segment. Is that a cyclical trend or is that the new way customer preferences have moved?
Actually, immediately after Covid this segment grew. It did not decrease, it went up as a percentage of the total industry and we are talking of percentage of the total industry because overall the industry also shifted down in 2020 and there was comparative growth in 2021.

It is only in the last year that we found the entry segment coming down a little more sharply than in the past. So we believe that is obviously a function of affordability. As far as the demography is concerned, we are a very young nation and we would always have a large percentage of first time buyers and there have been 47-48% first time buyers consistently for the last 20-22 years and that has not changed.

I would expect first time buyers to keep coming, it is only a matter of affordability which is affected by cost of the vehicles going up or regulatory requirements or taxation or insurance going up or road tax registration going up. In this segment, the elasticity of demand with respect to prices, the cost of acquisition is pretty high. So that has been the primary reason. It is not as if the demand has disappeared. It is about how best to fructify the demand and that means that companies would have to look at their cost structures more closely especially for this segment.

If we are in for good monsoon and if commodity prices stabilise, should shareholders expect that in the second half of this year, they would be served with bread and a lot of butter?
I do not know about that bread or how much butter, but definitely we cannot really give any forward guidance but I think the bread will be toasted better.

If I read in between lines, can I safely say that if the worst of the demand pressure and the worst of the margin pressure – if commodity prices do not go higher and stay where they are with the downward bias – is certainly behind Maruti?
I cannot give that forward guidance except to say that while it is lunch time, toasted bread is normally eaten in breakfast. So you will have to wait till breakfast time.

So what are the health delicacies we should expect for shareholders? Shareholders talk about margins, cash flow, market share and they focus on all the other aspects. What are the health servings we should expect?
Of course, consumers expect to have more variety on the breakfast table and we would definitely be serving some of those varieties which have been missing in our overall portfolio. So you could have more dishes of different types and definitely Maruti Suzuki always looks at how healthy the dish is when it is being served to the consumers.

came out with the first small car with AC, first small car with a power window, first small car with the power steering. You have managed to move up the value chain in the sedan market very well, but somehow in last couple of years, that innovation – -whether on the EV front or the innovation front is missing. How would you defend that?
I will be happy to answer that. Yes, we have been first movers in most of the categories including the smaller MPV category. Innova was a very large MPV at that time when we moved into Ertiga. We had the Swift which was the premium hatch at that time. People said you have Zen, Alto, who will buy your Swift? It was the same with Baleno, Brezza which is an SUV. In fact, we were the first people with success in entry level SUVs when the Brezza came in. It is still the market leader.

It was thought that the small SUVs would not sell but they did and others followed. So the innovation did not really stop. If you look at the mid SUVs, where we have the S-Cross and that is also a first mover.

But unfortunately, our market positioning was probably not great and it has not done great numbers. As far as EVs are concerned, we have to look at the entire ecosystem. It is not about product innovation, it is also about the entire ecosystem and making it convenient to consumers. We have two big barriers in EVs at the moment, the cost of acquisition and also the charging infrastructure which is leading to anxiety among consumers.

So while the optics are a little messy for us, we always look at consumer convenience and whatever technology it is and I can tell you in hundred out of hundred times, we will look at the customer focus and customer convenience rather than the optics.

I have been told by channel checks that the rural real estate prices have gone higher – whether it is in small town or farm land prices. If the factors are supporting agrarian economy and agrarian demand, why is the auto sector suffering because of low rural demand?
In the auto sector, I think you are referring to the two-wheelers in terms of suffering of demand. But as far as Maruti Suzuki is concerned, our growth in rural areas has been higher than in the urban areas.

Therefore for four-wheelers, this may not be true statement and agrarian demand has been going up and in fact has been always higher than urban demand, the rural demand is always higher than urban demand, I have seen it for the last 17 years there has been only one year which was I think 2012 or 2013 when the rural demand in terms of growth was less than the urban growth.

It has always been good. Last year, Maruti Suzuki’s share in the overall rural portfolio was about 43% against 42% the previous year. That means that it outpaced urban growth and there are many reasons for it. There has been a lot of investment in the rural sector by the government, infrastructure investment and also there have been regular monsoons for the last three years. We have good water reservoirs if we look at the long term averages. We have had record rabi sowing even this year, kharif output has been good, MSPs are higher.

Kharif price just last month came down a little bit because of the excessive heat but otherwise, it seems to be on the right track. For the two-wheelers though, the story has been quite the opposite and although I am not an expert on two-wheelers, it seems that is even more sensitive to running cost which is reflected in the fuel price going up. That explains the reason for a decline in the rural sector for the two-wheelers.


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