Maruti Suzuki India Limited analyst Q&A

Thank you. We will now begin the question -and-answer session. The first question is from the line of Pramod Kumar from UBS. Please go ahead.

Rahul Sir, are there any one -offs in the quarterly results? Given the high retail velocity, what was the per car discount number? I will then follow up on the margins.

No real one-offs as such. The discount in the quarter on wholesales was around INR 23,300 per vehicle. This is against the discount of INR 17,700 per vehicle in Q2 FY23 -24. We must keep in mind that this discount is distributed over wholesales, while we give discounts on retail sales. 5 | P a g e

The margin numbers look interesting because you were close to 11% last quarter, with the best of the utilization and wholesales and despite offering higher discount. Should I presume, some of this should roll off? How should one look at the margin outlook? Is it probable that Maruti’s margin band has now moved to a double-digit range?

We never comment on margin outlook. But we can certainly discuss the margin drivers individually. You are aware of the margin drivers. The biggest factor that affects us is the volume. And you would know that in the auto sector, the 4th Quarter is usually a good quarter, because of cyclicity and seasonality. The second element is stock at dealership. At the end of the calendar year, we try to minimize stock at dealerships. Hence, in quarter 3, retail sales usually exceed wholesale. In quarter 4, you need a healthy stock in the market to recover the stock levels. To that extent, discounting should be optimal. which is a positive for us. We have announced a price increase in the range of about 0.45%, which will also help. In commodities, steel might show some upward movement. We expect some continuation of the past benefits on movement in PGM, palladium, rhodium, etc. On FOREX, we had gains in Quarter 3 on direct imports and indirect imports happen with a lag. Hence, the benefit should continue in Quarter 4. For direct imports, the rates which are prevalent in Quarter 4 will apply. However, we are dependent on the volume uncertainty of the market, which continues.

Fair enough. The second question is on the retail sales scenario and the inventory situation. We have FADA mentioning alarmingly high levels of inventory in the car industry, predominantly in the small car segment. Where does your inventory stand, at the end of the quarter? What would be the likely month end inventory with your dealers? How has the small car inventory moved over the last few quarters? Can you help us understand the overall inventory situation, especially for the small cars? Since this will have an impact on discount levels going forward.

I won’t be making forward looking statements. There’s a lot to do with the fine print and the assumptions. Maruti Suzuki had a low and healthy closing stock. The quarter ended with the stock below 45,000 units. We started the New Year light and ready to provide more cars to the dealerships. On the inventories in the market, there is no concern and it’s a normal and healthy situation. We have pending bookings of about 215,000 vehicles at the end of Quarter 3.

Thank you. The next question is from the line of Gunjan Prithyani from Bank of America. Please go ahead.

Couple of questions from my side. First, expanding on the data that you gave on discounts, can you talk about the retail sales in Quarter 3 FY23-24?

Retail sales in Quarter 3 were much higher than the wholesales. We retailed ~530,000 vehicles, which was a reduction of ~115,000 units from network stock.

Okay, got it. Any meaningful change in the royalty numbers? or does it stay in that same range, around 3.7% to 3.8%?

The royalty stands at 3.5% which is 30 basis points lower, sequentially. But this number depends on the new models entering and going out of the discounted royalty rate etc. Hence, this figure keeps hovering between 3.5% to 4.0%. 6 | P a g e

Okay, got it. Now, my question next question is on growth. Going into FY 2025, how should we think about growth? What is the outlook on customer bookings and inquiries? How is the mini and compact car portfolio of Maruti Suzuki continuing to shrink? What is your outlook on industry growth and Maruti Suzuki’s growth, given the high exposure of the Company to the mass segment.

Before addressing the growth outlook in next financial year, I should mention that India n passenger vehicle market is already at a high base. This year, the industry will sell ~4.2 million vehicles. Although not finalized at the CEO level, SIAM has made preliminary sales estimates for next year. According to the preliminary discussion in ‘16th SIAM Looking Ahead Conclave’, in the next year, 4.3 million vehicle sales are expected. Maruti Suzuki intends to grow faster than the industry. You are right, the industry growth could be much better had it not been for the small car segment. The small car segment is shrinking, in both percentage terms and in absolute terms. Due to regulatory intensity and introduction of too many regulations together, the cost went up suddenly. There is a strong latent customer demand for cars, but it’s a function of affo rdability. In simple economic terms, affordability is the only big hurdle. We think, as the income growth catches up with the increased acquisition cost, small car demand should revive. Hence, we are putting our hopes on the small car segment to come back in future, but not immediately.

Okay, got it. The second question I have is on the product side. You have done a lot in terms of plugging the SUV gap in your product portfolio. But are there more white spaces in your product portfolio tha t you are planning to address in the coming 12-18 months? Maruti Suzuki is not present in the micro - UV segment. Should we expect new product launches in the next 1 to 3 years?

As we have announced, we will have 28 models by the turn of this decade. This means we must develop at least 10 more models. This is in addition to models that need to be refreshed. So, certainly there is a strong model pipeline and of course, the model pipeline must reflect the consumer preferences. We will be where consumers want us to be. One model that I can talk about is our EV, which will enter production in this calendar year. This model will also be exported. But we will be covering all segments that are important from a volume point of view.

Thank you. The next question is from the line of Raghunandhan N L from Nuvama Research. Please go ahead.

Couple of questions Sir. First, the first-time buyer’s share has reduced to ~40% from pre COVID levels of ~50%. What is your outlook on triggers for first time buyer demand recovery? And do you see any trends which can trigger this recovery?

A very interesting question Raghunandan. We are analyzing this very carefully. The highest (first time buyer share) we had reached recently was 47% in FY 2021. It went to a low of 38% in Quarter 2 FY 23-24. In Quarter 3 FY 23-24, it inched upwards to 41%. However, it is too premature to conclude whether it’s a green shoot of recovery, or it’s just noise or a quarter specific phenomenon. Before we come to any conclusion, we would like to see a more sustained trend.

Got it sir. And my second question is on the order book. You still have a lot of pending orders for CNG automatic vehicles. How are you trying to address these supply constraints?

Okay. The good part is that the semiconductor issue has been resolved. At least in the foreseeable future, we don’t have any such issue. Our production capacity, which is ~2 million units per year, might become the ne xt 7 | P a g e bottleneck. And as you notice, in Q2 FY 23 -24, we did sales comparable to our production capacity. We need some headroom in production capacity if we want to attain growth. By March’24, in Manesar, we will have ~100,000 units capacity addition. And we could also utilize Gujarat more. In the year 2025, we should have the first production line of 250,000 units operating at Kharkhoda plant. When there’s a ramp up, you don’t get full capacity on day one. But that capacity will come. In the short run, there a re some minor bottlenecks that are holding up CNG supplies. These issues will get resolved soon.

Thank you sir. One last question on the upcoming BEV to be launched in 2024. Historically, Maruti has always been providing its customers wit h the best cost of ownership. Will this be continued in EVs by configuring a dedicated platform and aggressive localization efforts?

See the interesting phenomena about EVs in India, the EV customer profile is quite different than that of ICE . The same parameters are not at the top of an EV customer’s mind. Generally, this is a higher segment customer with a charging infrastructure at home. This customer will most likely use the EV to commute to the office and has a predictable usage profile. The first SUV that we are launching in EV space is an upmarket vehicle. It’s bigger than the Grand Vitara, it has a high range, almost 550 -kilometer, battery capacity of 60 kilowatt hours. We have taken care of customers’ range anxiety extremely well. It w ill be a high spec vehicle. We are hopeful that the customers will receive it well.

Thank you. The next question is from the line of Vipul Agrawal from HSBC. Please go ahead.

My question is on CNG penetration. How is it shaping up in the southern part of the country? There is a strong penetration of CNG pumps in India now. What is the resultant increase in the CNG vehicles? Can you give me both the overall industry situation and Maruti Suzuki’s situation?

Development in CGD infrastructure helps increase the CNG penetration. Some new geographies are being added. This is helping CNG sales. We have reached a CNG penetration of 30.8% and we see headroom going further. In some models, the CNG penetration is more than 50%, Ertiga: 57%, WagonR: 50% and Dzire: 44%. Similarly, there are cities with high CNG penetration. Delhi has 47% CNG penetration. Traditionally, Gujarat, Delhi and Mumbai used to be strong CNG markets. But now, Pune has picked up big time. In new cities, where they have reached a critical mass of stations, we find good absorption of CNG. We are in contact with the CGD companies to have joint promotion schemes. Because of these schemes, we can sell more CNG cars. But the CGD companies get to sell CNG fuel across vehicle lifecycle. Hence, CGD companies are quite interested in partnering for joint promotion of CNG vehicles.

My second question is on the CNG portfolio of Maruti Suzuki. Your models mostly have a single cylinder CNG, while the competition has launched a 2 -cylinder CNG variant. This product provides much better boot space. What is Maruti Suzuki’s strategy to counter this? Can we expect a similar product from Maruti Suzuki?

It is good feedback. We are closely monitoring consumer insights. There are other technologies in our active consideration, and we are aware of the competitive landscape.

Thank you. My next question is on the export market. Can you tell us about the export strategy for the next three to five years? What is the new model launch pipeline like? How is the performance of existing models? Are you seeing some challenges? 8 | P a g e

I’ll take your last question first. We are seeing some logistical challenges because of the Red Sea issue. And there may be some increase in costs because of risk or because of rerouting of vessels but it should not be significant. The lead time of dispatches might change and there may be some uncertainty in vessels coming and picking up their consignments, etc. That’s a small issue which is quite common in the export business. In the last calendar year, we exported ~270,000 vehicles. This was the highest ever export number for us. We should be able to do better in the coming years. By the turn of this decade, our ambition is to go up to at least 750,000 units in annual exports. Africa is turning out to be a good market . For several reasons, the Middle East region has picked up quite well, recently. The government is also signing some FTAs w here we get some relief in duty. With UAE we have an FTA in place. FTA is under consideration with six Gulf countries. Latin America is next. With our EV, we will re-enter Europe and Japan.

Yes, Sir. Are you expecting any new model launches for exports?

No. Usually, we sell from our existing portfolio. Jimny -3 Door was the only unique model that we were exporting, but not selling domestically. Now we have Jimny-5 Door. The top models in our exports are Baleno, Dzire, Jimny, Swift and Grand Vitara.

Thank you. The next question is from the line of Amyn Pirani from J.P. Morgan. Please go ahead.

Two questions from my side. First is a bookkeeping question on margin improvement. On a Y -o-Y basis, the margins have improved, but on a quarter -on-quarter basis, they have declined. Can you highlight 2 to 3 major reasons for the margin movement?

I’ll talk about sequential first. I had mentioned in the past, the operating leverage is the largest lever i n determining the margin. We lost ~110 basis points on account of operating leverage, since in Quarter 3 we have lower wholesale and more retail. Discounts adversely impacted the margin by ~70 basis points, advertisement was up by ~30 basis points. So, there was a net negative ~210 basis points. On the positive, we gained on FOREX by ~30 basis points, on royalty by ~30 basis points. In commodities, the steel was marginally up, but we gained somewhat on PGM, with a favorable impact of ~10 basis points. So, gain of ~70 basis points. Overall, sequentially on EBIT, we had ~130 basis points fall from 11.2% in Quarter 2 to 9.9% in Quarter 3.

Are you seeing a lot of first -time buyers moving upward from smaller cars like WagonR, Celerio and maybe going straight into micro-SUVs or moving within your portfolio, towards Swift or Baleno? There is a lot of model launch momentum in micro-SUVs segment, and even more launches are happening on the slightly bigger cars at the entry level. While you still have more than 10-year-old models. Can you comment on this?

These factors affect the small car demand, but not in large part. De -growth in small car demand cannot be explained by just this phenomenon. Otherwise, the total growth of the industry would have been much higher. I could imagine, while there are some customers who are skipping the levels, there are many more customers who are expecting the prices to be more benign and affordable. We had a price point of INR 2.5 lakh for Alto 800. Now, the minimum price at which you can buy a car in India is above INR 4 lakhs. And even at that price point, not much sale happens. So, we are waiting for the income growth in that consumer segment to catch up the price point. After that we can hope for some small car demand revival. These are some relevant numbers; total hatches sold in FY22-23 for Maruti Suzuki were ~9 45,000 units and it came down to ~836,000 units. The total hatch 9 | P a g e segment in the industry during the last quarter has come down to ~25%. At the peak, in FY 17 -18, this number was at ~47%. So, it’s a large shrinkage.

Thank Rahul Sir. If I can just squeeze in a follow up question, if the affordability and the income levels of the first-time buyer improve in 6, 12 or 15 months, do you think the customers will come back to the lower end hatch level? or do you think they w ill come at the level of upper end hatch and micro -SUV segment? And if they do come at the lower hatch level, will you also need to make some exciting product launches in that segment?

So, it depends on the shape of the consumer pyramid. Whenever such a phenomenon happens, it starts from the upper end and then goes down deeper. That’s a natural and continuous progression we have seen. We have some exciting products in that segment. You need a very critical balance of all the parameters that a customer looks for and that is continuously being researched. Infotainment features and SUV like design are some of the larger trends affecting India.

Thank you. Ladies and gentlemen, that was the last question for today. With this, we conclude today’s conference call. On behalf of Maruti Suzuki India Limited, we thank you for joining us and you may now disconnect your lines.