Swift sales ahead  ( May '30,2005, BS)

With competitive pricing and superior features Maruti's small big car should turn the company swifter on the growth track.

The launch of the 'Swift' was eagerly awaited and Maruti has not disappointed, launching it at a price that's about 15 per cent lower than its direct competitor, Hyundai's 'Getz'.

What's more, at around Rs 4 lakh (ex-showroom Mumbai) for the base model, the Swift is priced only about 13 per cent higher than the base model of the Santro and 18-20 per cent higher than the base models of Zen and Wagon R.
Financials
(Rs crore) FY05 FY04
Sales 10962.41 9345.58
Other income 391.46 377.65
PBIDT 1792.96 1308.18
OPM (%) 16.35 13.99
Net profit 853.63 542.18
NPM (%) 7.78 5.80
EPS (Rs) 29.54 14.46


While on the flip side this could lead to some cannibalisation, what's more important is that at this price, the Swift could capture market share from rivals in the B segment.

According to an analyst from leading domestic broking house, the Swift will take away volumes from competing models like the Santro and Getz more than Maruti's own models.

"Going by the contemporary styling and radical looks of the Swift, it should attract the young and unconventional buyers who are the potential Santro/Getz buyers."

Traditional buyers may still prefer the Zen, which means that a bulk of the Swift volumes will come at the cost of Santro or Getz. Analysts believe the Swift will be able to maintain its aggressive pricing because of the low import content.

"It's the high localisation element that's enabled Maruti to price the Swift aggressively," says Ajay Shethiya, auto analyst, Enam Securities. For the record, the import content in Hyundai Getz still stands at around 50 per cent compared to only 15 per cent for the Swift.

"Some amount of cannibalisatrion in other Maruti cars, however, cannot be ruled out," he adds.

Currently, because of the large price differential between the B and the B+ segment, sales of the latter have not been too high. The Getz averaged sales of just 1264 units a month in the past three months. B segment sales, in comparison, are much higher.

In the case of Maruti, sales of Alto, Zen and Wagon R average more than 25000 units a month. Thanks to its competitive price and smart features, one can expect some of these customers to migrate to the Swift.

But what about profitability? The Swift offers features that are worth more than, say, the price differential of 18-20 per cent compared to the Zen and the Wagon R. Does this mean that the new car will be less profitable than the company's earlier models?

The company points out that the extent of localisation in Swift is the highest for any of its models at the time of launch. For most other models, imported parts accounted for 40-60 per cent of the total content at the time of launch, even though they now stand at over 90 per cent.

To start with, Swift's margins are expected to be lower than that of the Zen and Wagon R. But Maruti has already said that it plans to increase the extent of localisation closer to the 100 per cent mark in the near future. This, coupled with volumes of about 5000 a month, should make the Swift as profitable as other models.

Analysts expect Swift to sell about 5000 units a month this fiscal. Interestingly, they have revised sales expectations from the Swift from 1500 earlier (based on the performance of the Getz) to 4000-5000 units a month.

If these expectations are met, the model would account for about 10 per cent of overall volumes. Even if Swift's margins are lower than that of other models, it is not expected to impact overall margins significantly.

But there are some other concerns about profitability going forward. Raw material prices continue to be higher on a year-on-year basis, and the price increases taken by Maruti are not enough to fully offset the increase in cost. Unless there are further productivity gains, margins could take a hit.

Further, there is a possibility that the discount Suzuki gives Maruti on royalty and components imported from it could cease. This could hit profit estimates for future years sharply. The discount was originally intended for two years and will be up for renewal this year. Analysts, however, believe that the benefits will continue.

Another concern is the company's capacity which is currently around 6 lakh units per annum on a two-shift basis. Having clocked volumes of 5.36 lakh in FY05, it seems like the company would face capacity constraints if it grows by about 12 per cent this fiscal. There's fresh capacity coming, but that's expected only by the end of calendar year 2007.

According to the company, it can increase production through some de-bottlenecking and increased shifts. If there are still capacity issues, Maruti has said that it will give the needs of the domestic market preference over export markets.

Going by the trend in the first four months of this calendar year when Maruti's volumes grew by less than 1 per cent, it doesn't look like capacity would be a major worry in the immediate future.

Coming back to the launch of the Swift, the timing couldn't have been more opportune for Maruti as it should help revive growth numbers for the company.