Extraordinary Maruti results? Where art thou common sense?

Going by the mainstream media reports, Maruti Suzuki seems to have achieved an extraordinary increase of profits in a subdued market. This is as per the quarterly results of March 2013. In spite of a reduction in sales Maruti Suzuki has been reported to have an 80% increase in net profits over the previous year. Business journalists have been going head over heels on this announcement. The success is attributed to better product mix, lower discounts, price hikes, localisation and favourable price of yen. Truly amazing indeed.

The major and only contributor to the high profits is the reduction in cost of materials. There is a direct 7% reduction in cost of material consumer. The cost of material consumed has fallen from being 21.4% of sales to 18.3% of sales. In the quarter ended March 2012, an average car would have Rs. 2.46 lakh worth of materials. In 2013, in spite of inflation and in spite of a higher proportion of larger cars being sold this cost has come down to Rs 2.39 lakhs per car. Larger vehicles would clearly demand more material and thus this cost should have increased. Surprisingly, the cost choose to come down.


Let us first try to understand the imported materials. An average of weekly prices from April 2012 to March 2013 is Rs. 1.52 for one yen. For the previous year in the same period this was Rs. 1.64. This is around a 7% depreciation of the Yen versus the Rupee. Maruti Suzuki imports around 25% of its raw material and of this around 80% is from Japan. Applying this formula to the cost of material consumed, the imports from Japan for quarter of March 2012 would be Rs. 177,482 lakhs. A 7% reduction to this, because of currency depreciation by 7% would create an import bill of Rs. 165,058 lakhs. If we apply the formula (80% of 25% of the total cost of material consumed) to the quarter of March 2013 we get a remarkably similar actual value of Rs. 164,514 lakh. This is less than half a percent off the predicted value. We can safely assume that the yen depreciation has caused a 7% reduction in the import bill. Also, we must note that as the Yen rises this saving is bound to vanish. (In fact the Yen has already appreciated by around 5% in April 2013)

Since the total material cost reduction was 7% over the two quarter, it means that there has been an equal 7% reduction in the domestic procurement of the year. When prices of metals (steel and aluminium) have remained more or less steady, this 7% reduction seems hard to believe. There is no definite word on how this 7% cost reduction has been achieved without a corresponding reduction in the prices of basic inputs. Maruti Suzuki attributes this to reduction of suppliers and other techniques which have been standard industry practices for decades. To attribute the dramatic reduction to such standard techniques seems highly improbable. And if it was actually due to these techniques, that Maruti Suzuki avoided doing this for so many years also points a finger at the ability of the management. 

Obviously the financial reporters have not cared to question the company and have not done their homework. They merely choose to report directly from the company data and for reasons best known to them, create a feeling of exuberance, when no reason exists for the same. The future for Maruti Suzuki seems quite bad to me. The appreciating Yen would hit the imports hard. It would also not be possible to keep the local procurement costs low when the input costs are rising or at best steady. 

The quarter ending June 2012 was a very poor one for Maruti Suzuki. Any decent performance for the quarter ending June 2013 would thus again show a significant increase in profits. However, given the skills of financial engineers within firms, it would not be correct to base company analysis on the data and information supplied by the company itself. Analysts must dig deep, get a thorough understanding of the firm's business, ask relevant questions. Only after this, should any kind of analysis be submitted.  My prediction for Maruti Suzuki is that I do not see a significant change in the profits over a year. What do you feel? 

The issue of low truck speeds in India

It is very well known that the average speed of trucks in India is only around 20 kmph. There are estimates of a loss of Rs. 60,000 crores because of this. The Global average speed is said to be 60 - 80 kmph. These numbers point to a significant cost reduction opportunity in logistics.

The toll plazas, checking points and the poor road conditions are the familiar culprits for this ailment of low speed. Firms have been pointing fingers at the government and are painting a picture of them being in a helpless position. However the frequent truck breakdowns, vehicle overloading and poor driving discipline are also major causes of this low speed. These factors can easily be regulated and are in complete control of the firms. 

A two lane road (with one lane for each side) with all vehicles moving in an exact straight line can easily have vehicles travel at a very high inform speed. There are many assumptions in this statement however. The first assumption is that all vehicles are moving at a uniform speed. Because of over loading and also poorly maintained vehicles the speed of a very few vehicles is at around 20 kmph. Especially in cases of two lane highways such vehicles can easily slow down all the other vehicles. Given that only about 14% of the national highways have 4 or more than 4 lanes, this problem affects more than 85% of the Indian National highways.

In most cases the truck drivers are also least likely to follow the discipline of lanes. For four lane roads (with two lanes for each side), if all the slow vehicles could drive in one lane, the other lane could accommodate fast moving vehicles. Because the truck drivers choose to use the lanes that they deem fit at the spur of the moment, the entire highway network is slowed down.

Frequent breakdowns are also a major cause in slowing down the vehicle movements. For various reasons we have had poor maintenance management in professional as well as the owner driven vehicles. The high average age of vehicles (debated to be around 12 - 15 years) is also partly to be blamed for the high rate of break downs. Like the issue of a slow moving vehicle mentioned above, a vehicle breakdown would also cause a reduction in speed for all traffic on that route.

The altruistic answer to this problem would be for all firms to pay attention to vehicle maintenance and driver training and also ensure that all instances of overloading are avoided.  Easier said than done. Low margins in business are forcing logistics firms to minimise the immediate expenses on maintenance also to resort to over loading and such tactics. It would seem that any firm that stays 'honest' would obviously not be able to survive. The honesty and survival issue are topics for another blog.

The main point here is to get the industry to work on the same set of rules that minimise road disruptions and thus lead to high overall speeds. Such industry wide change can only come by forcing the application of the relevant laws in earnest. Instead of lobbying for easier rules, Organised firms should in fact push for strong rules and strict application. Given their expenses, it would be close to impossible for single truck owners to survive without overloading. Such changes would easily throw the unorganised players out of business and allow the organised players to expand their business footprint. That such strict rule implementation could also improve vehicle speed and thus profits would of course be an extra added advantage