Maruti H2 sales may match year-earlier levels, FY22 may see growth: RC Bhargava

Bhargava made a fervent pitch for tax concessions from the central and state governments and said they should recognise the importance of supporting faster growth of the car industry as a means of reviving the economy and creating larger employment opportunities.

by · The Economic Times
Bhargava said even prior to the road tax increase in FY20, the tax on cars in India was far higher than in any other car manufacturing country.

Mumbai: Maruti Suzuki is expecting sales in the second half of the ongoing fiscal 2021 to match those in the previous-year period, before the market gets back to a phase of growth in FY22.

In his address to shareholders in Maruti Suzuki’s 39th annual report, chairman RC Bhargava said the company's sales and service organisation had become fully functional and that demand for its products had recovered well, too. The passenger-vehicle market leader sold more than 100,000 vehicles in July, crossing that mark for the first time after March when the Covid-19 pandemic and then the lockdown forced factories to close down and disrupted the market.

"The rural economy is quite robust thanks to a good rabi harvest and the expected normal monsoons. The sales in the rural areas are growing faster than urban areas and we are hoping that in the second half of 2020-21, sales may be near the performance of last year and 2021-22 should be better,” he said.

However, given the uncertainty on the demand environment in the midst of the pandemic, the company’s plan to shift the Gurgaon facility and set up a third line in Gujarat has been delayed.

Bhargava made a fervent pitch for tax concessions from the central and state governments and said they should recognise the importance of supporting faster growth of the car industry as a means of reviving the economy and creating larger employment opportunities.

The car industry constitutes about 50% of the auto sector, which contributes around 40% of the manufacturing sector’s share of GDP, he pointed out. "If the manufacturing sector has to contribute to 25% of GDP even by 2025, car sales must increase at a much higher rate than in the past," he said.

Bhargava said the downturn experienced by the automobile sector in FY20 was “inevitable”. The market was pulled down by a combination of substantial price increases and uncertainty in the minds of consumers.

Car sales fell 18% in the fiscal year ended March 31 from the previous year. At Maruti Suzuki, sales dropped 16% while profit shrank 25%.

In the year gone by, several state governments also decided to substantially increase the rates of road tax. Road tax is a one-time tax and is realised at the time of sale, further adding to the consumer’s cost of acquisition at a time when prices had risen significantly due to regulatory changes and woes at non-bank lenders impacted car financing.

Bhargava said even prior to the road tax increase in FY20, the tax on cars in India was far higher than in any other car manufacturing country. In the European Union, the VAT is 19% and no other taxes. In Japan, taxes are around 10%. Given the much lower per-capita income in India, this created an affordability issue for many aspiring car owners, he said.

"In FY 2019-20, the increase in the cost of acquisition of a car, coupled with the higher hurdles to be crossed to obtain a loan, led to a fall in sales. It was proven that the price elasticity of demand is a real concept," he said.

Bhargava said the June production was better, and the company expected to gradually increase output and sales as the situation improved and workers returned from their villages.

Managing director Kenichi Ayukawa said the biggest challenge to ramp up production was the shortage of manpower and localised lockdowns which were affecting the supply chain.

“In the automobile business, volume is critical for profitability. In FY 2019-20, the impact of volume contraction was so large that despite significant cost reduction measures adopted by the company, decline in operating profit was much pronounced,” said the MD.

To arrest the decline in sales, Maruti has stepped up digital campaigns through hyper-local activities for identifying potential customers, tied up with financing partners for improved credit availability and offered model-specific promotion schemes like 5-year warranty to address the uncertainty in the minds of customers, Ayukawa said. The company has also expanded its sales network further deep into the country.

“India’s long-term economic prospects are promising which augur well for the automobile business. Experience from the global financial crisis suggests that the Indian economy is quite resilient, and it may not be too far to think that the Indian economy may recover relatively faster this time as well,” Ayukawa said, adding: “The company is making all-round efforts to both participate and drive this recovery.”