Maruti Suzuki to resume production with 50% workforce at Manesar plant: RC Bhargava

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Edited excerpts of an interview with Mr RC Bhargava, Chairman, Maruti Suzuki India; dated 12^th May 2020 from CNBCTV18:

• The carmaker will resume partial operations at their Manesar plant in Haryana with a 50% workforce. Manpower permission is around 75% with one shift only.
• The Company is allowed to start operations with one shift now and it will focus on a limited number of models.
• The Company will be able to assess the demand-side situation only after a few weeks. He added that it is difficult to predict the demand side as it is too early. The dealerships have started functioning, but not all of them are functioning. The level of inquiries is also respectable but at this moment there is some supply-side constraint.
• The overall volumes are bound to be impacted because of the ongoing restrictions and reduced manpower capacity. Normally the workings hours for the Company are 8 hours in one shift but with the various restrictions, the working hours are expected to come down to 6.5 hours in a shift. This reduces the capacity according to him. At the same time, the Company will be operating in only one shift with all other restrictions impacting the production quantity.
• For a clear demand side pictures, dealers should at least work for 2-3 weeks.
• Some of the suppliers for Maruti are in the containment zones. Therefore, the suppliers cannot produce in those areas. Maruti had to look for some alternative supplier for some components. Some models of the Company cannot be produced because those components cannot be found. Thus, the Company has to adjust the production volumes and models in accordance with the supply chain.
• There is no certainty as to which supplier will remain a supplier and that he will not come under a containment zone in the next 10 days according to Mr Bhargava.
• The Company may also face issues because the temporary workers at their Manesar plant have gone back to their villages.
• Maruti has given cash advance against supplies to many of its vendors.
• Overall, the auto industry could end up with 20-25% less sales compared to last year.
• The cars are taxed very heavily in India, making the affordability of cars an issue. He expressed hope that the government will keep taxes on cars at a reasonable level.

 Consensus Estimate: (Source: market screener website)

• The closing price of Maruti Suzuki India Ltd was ₹ 4,955/- as of 12-May-2020. It traded at 24.9x/ 19.0x the consensus EPS estimate of ₹ 199/260 for FY21E/ FY22E respectively.
• The consensus target price of ₹ 6,308/- implies a PE multiple of 24.3x on FY22E EPS of ₹ 260/-.

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