Maruti's Manesar Miseries

Maruti Suzuki has hit yet another speed breaker in its production in a now-familiar routine of labour unrest. Will the company be able to overcome its internal issues and live up to its brand reputation and growth record? Vidrum Mehta explores the matter.

KEY POINTS:

• Due to the lock-out, the production loss would be around 1500-1600 in terms of units per day and approximately Rs 70-90 crore per day in terms of value.
• The delays in production in the Manesar plant would further affect the company’s sales, and it would be unable to make deliveries for the festive season starting in the next 40 to 60 days.
• The Manesar plant produces cars such as Swift and D’zire, which have good margins and are highly in demand. Any delay will erode the company’s market share and would also impact its margins, the benefit of which would accrue in favour of its

Maruti Suzuki is widely held to have changed the way Indians drive. From entry level models that have helped a large section of the middle and upper middle class Indian consumer fulfill its aspirations of owning a car, to swanky, high-end models flaunted by those who can afford a higher price tag, Maruti has been a preferred brand for many.

More recently, however, the company has repeatedly surfaced in the news for all the wrong reasons. It has been facing a lot of operational hurdles, which have and will continue to impact its overall performance for at least some time in the future.

While all this has been going on for quite a while, the recent labour unrest that led to a lock-out at its Manesar unit has sent the stock price of this blue chip on a downward spiral. On the very next day after the Manesar episode, the Maruti stock fell by Rs 107, i.e. by a hefty nine per cent. From the event till date, the scrip is trading down by over six per cent, at Rs 1140.

This is not the first time that the company has faced a labour unrest. In 2011, it was affected by three strikes in July, August and October, which resulted in a production stoppage, thereby affected the company’s growth and thus its profitability.

The occurrence of such an issue is completely mistimed. It comes at a time when there are already a host of sector-specific issues plaguing the progress and growth prospects of auto companies, such as petrol price hikes, talks of diesel price deregulation, higher interest rates, a slowdown in GDP growth, inventory pile-ups and pressure on the margins on the back of higher input costs.

The situation is turning out to be so grim, that both customers and investors are asking only one question – “Kitna deti hai?” – which is also the punchline of its advertisement. While the former are posing this question with respect to the mileage, the latter group wishes to know what kind of returns the Maruti stock would provide.

Will the passenger car leader emerge from this mess and make investors happy by giving better returns? Or will it dash the investors’ hopes?

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What’s Cooking At Manesar?

Currently, Maruti is facing serious operational headwinds thanks to the trouble that has erupted at its Manesar plant out of the labour unrest. On July 18, 2012, the production at its Manesar plant was shut down due to strife led by the workers. The agitation turned violent, so much so that it resulted in one of its senior HR executive being charred to death. But what was the cause of this unrest?

Maruti broadly categorizes its labour into contract workers and permanent workers. It was the contract workers who had problems with the company’s management for their refusal to pay higher wages. According to media reports, the current wage of a contract employee in the company is approximately Rs 7000 per month, which is around half of what a permanent worker gets.

The workers had demanded a five-fold hike in their basic salary, a monthly conveyance allowance of Rs 10000, a laundry allowance of Rs 3000 and many other perquisites. Adding to this, the union also had made a demand for a seven-week paid vacation as against the existing four-week period. According to reports, the company was not in a mood to accept any of these demands, and this is what led to the flare-up.

The company’s version of the incident is that the unrest was caused due to the workers’ demand to allow a colleague to resume work even though he had been suspended for beating up a supervisor.

Driving Through Losses

As already mentioned, this is not the first time that labour unrest has impacted the company’s performance. There was a 13-day strike in June 2011, with tiffs resulting from the issue of recognition of the employees’ union. This was followed by a 33-day strike commencing on August 29, 2011. The last of these happened in October 2011, with the workers going on a 14-day strike, halting production for about 60 days over the year. This affected the September and December 2011 quarter performance, and the profits declined by 60 and 64 per cent respectively on a YoY basis. For FY12, the company’s production block of approximately 90000 units further created a speed breaker.

Around 37 per cent of the company’s total production capacity is supported by the Manesar plant. The rest of the units are manufactured at three other plants located in Gurgaon. Due to the lock-out, the production loss would be around 1500-1600 per day in terms of units and approximately Rs 70-90 crore per day in terms of value. Over the past 21 days, the accumulated loss in terms of units would be approximately 31500 units, which stands at around Rs 1900 crore in terms of revenue. To quantify this, it is five per cent of the company’s FY12 sales. Considering that there are no immediate signs of resumption of production at Manesar, it seems that the losses will continue to mount.

Management To Apply Brakes?

As of now, the lock-out is still not over, though attempts are being made to resolve the issue with the help of the Haryana police. Maruti has announced that all those involved in this incident have been permanently suspended. The company’s management has also made it clear that it will not provide any compensation to the temporary workers as per the prevailing labour laws during the lock-out period. It intends to stop using contract workers, possibly by March 2013.

There are also rumours that Maruti could shift its Manesar plant to Gujarat. On its part though, the management has clarified that there is a new plant in Gujarat which will increase the capacity, and that the Manesar plant will continue to operate as before.

Will Maruti Swerve Back On Track?

The topmost question is whether Maruti will be able to get its Manesar plant back on track. As yet, there have been no hints as to when the production is expected to start. Conventionally, the December quarter is when the automotive companies post good numbers on the back of many festivals. The delays in production in this plant would further affect the company’s sales, as it would be unable to make deliveries for the festive season starting in the next 40 to 60 days.

Further, the Manesar plant produces cars such as Swift and D’zire, which have good margins and are highly in demand. Any delay will erode the company’s market share and would also impact its margins. The benefit of this would accrue in favour of its close competitors like Hyundai and Tata Motors.

Meanwhile, the Society of Indian Automobile Manufacturers (SIAM) has revised its growth outlook for the four-wheelers segment to about nine to 11 per cent from the earlier 10 to 12 per cent. In the June 2012 quarter results, the company’s topline increased by 27 per cent to Rs 10778 crore but the bottomline decreased by 23 per cent to Rs 424 crore. Maruti also faces issues on the margins front due to rising input costs coupled with rupee depreciation against the Japanese Yen, which resulted in a 3.45 per cent decline in operating profits.

However, since Maruti has an excellent brand recall and good products, any sudden positive move on the Manesar plant front will provide an impetus for a spurt in stock prices. Since the time of the IPO, the stock has yielded returns at a CAGR of around 28 per cent in the past nine years. Considering this, we feel that those who are holding the stock should remain invested in it. Fresh investors in the counter should pay heed to the saying which goes “Try to price the stock rather than timing it”. Hence, they should look at the fall in the price as an opportunity to enter the stock in a staggered manner.