Ladies and gentlemen, good day and welcome to the Q3 FY2021 Earnings Conference Call of Maruti Suzuki India Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Pranav. Thank you, and over to you, sir.
Thank you, Margaret. Ladies and gentlemen, good afternoon once again. May I introduce you to the management team from Maruti Suzuki? Today, we have with us our CFO, Mr. Ajay Seth. From Marketing and Sales, we have Member Executive Board, Mr. R.S. K alsi, Executive Director, Marketing and Sales, Mr. Shashank Srivastava, from Corporate, Executive Vice President, Corporate and Government Affairs, Mr. Rahul Bharti, the General Manager, Corporate Strategy and Investor Relations, Mr. Nikhil Vyas. From Finance, we have Executive Director, Mr. DD Goyal, Executive Vice President, Mr. Pradeep Garg, and Mr. Sanjay Mathur. The con call will begin with a brief statement on the performance and outlook of our business by Mr. Seth, after which we'll be happy to receive your questions. May I remind you of the safe harbor?
We may be making some forward-looking statements that have to be understood in conjunction with the uncertainty and the risks that the company faces. I'd also like to inform you that the call is being recorded, and the transcript will be available at our website. I would now like to invite our CFO, Mr. Seth. Over to you, sir.
Thanks, Pranav. Good afternoon, ladies and gentlemen. May I start with some highlights of our product offerings and our company initiatives? India's favorite car, Swift, became the best-selling car in calendar year 2020. Swift sold over 160,700 units in calendar year 2020, emerging as the top brand in the pecking order. Swift has been the best-selling premium hatchback in the country for the past 15 years, with sales over 2.3 million units. Super Carry, which was launched in 2016 as the first commercial vehicle of the company, has created a niche for itself within a short span and has become the second best-selling mini truck in the light commercial vehicle market. Sold across 235 cities through over 320 commercial outlets, Super Carry has recorded a market share of 15% in financial year 2019-2020 and nearly 20% in financial year 2020-2021.
Recently, the company commenced the export of Jimny three-door, four-wheel drive, all-terrain vehicles to Latin America, Middle East, and African markets. In a customer-friendly initiative to further digitize the car-buying journey and provide ease and flexibility to the customers, the company recently launched the Smart Finance service. With the launch of Smart Finance, Maruti Suzuki has become India's 1st OEM to offer an online end-to-end real-time car finance service facility. The company has been making efforts towards the proliferation of environment-friendly vehicles, which are an immediately scalable solution in Indian conditions. In the 1st nine months of the financial year, the sales of CNG vehicles for the company have grown by 18.9% over the same period last year, at a time when the overall industry sales declined by approximately 16%.
In an employee-friendly initiative, Maruti Suzuki completed a housing township of affordable, modern, eco-friendly houses for its employees in Dharuheda area and handed over the first batch of houses to its employees. This is the third housing project initiative of the company for its employees. Ever since the first housing project in 1989, the company is actively supporting the needs of employees to own their house. The company will continue to be sensitive to the needs of all stakeholders and take steps to take care of their interests towards sustainable growth. Now, let us come to the quarter three. The demand momentum, which built after lockdown, continued in quarter three as well, with the festive period adding to the consumer sentiments. Usually, the sales during the 3rd quarter remain good on account of the festival period and year-end phenomena.
Sales this year were also on a similar trend in quarter three. While the demand in the urban pockets started to improve during the quarter, the rural markets continued to perform well. As a result, the rural sales penetration stood at over 40% for the quarter. Despite good performance in quarter three, the company's sales for the period April to December, financial year 2021, volumes are lower by 18% year-on-year. It is also important to keep the long-term growth trends of the Indian passenger vehicle industry in mind. The industry sales CAGR during the decade 2000- 2010 was 10.3%, which slowed down to 3.6% during the decade 2010- 2020. In the five-year period ending March 2020, the growth was just 1.3%. The auto industry has been witnessing a structural deceleration even before COVID. How long the current demand momentum will continue is still to be watched for.
The auto industry has a strong correlation with economic growth, and unless the economy sees a broad-based recovery, we have to remain cautiously optimistic. During the quarter, the company ramped up production while keeping health and safety of the employees as a priority and made full utilization of the capacity to serve market demand despite supply chain hurdles. Though this quarter was good from a sales volume perspective, in terms of margins, a significant increase in the commodity costs eroded the gains of higher capacity utilization. In this quarter, in addition to precious metals, the impact of steel was also pronounced. Given the uncertainty on the sustainability of demand, an increase in input costs could not be passed on by way of price increases. However, the sales promotion expenses were controlled to a certain extent. The company has stepped up its efforts for cost reduction to partially offset the impact.
Coming to financial results now, these results have to be viewed in the context that the previous year, financial year 2019-2020, had a sales volume degrowth of 16%, and therefore, growth percentages over the low base will not convey the correct picture. For the period October to December 2020-2021, the company sold a total of 495,897 vehicles during the quarter, higher by 13.4% compared to the same period previous year. Sales in the domestic market stood at 467,369 units, higher by 13%, and exports were at 28,528 units, higher by 20.6%. During the quarter, the company registered net sales of INR 222,367 million, higher by 13.2% compared to the same period previous year.
The operating profit for the quarter was at INR 14,848 million, a growth of 19.3% over the same period previous year on account of higher sales volume, cost reduction efforts partially offset by increase in commodity prices and adverse foreign exchange movements. Net profit for the quarter stood at INR 19,414 million, higher by 24.1% over the same period previous year, owing to the above factors and higher non-operating income. Coming to highlights for nine months, April to December, the company sold a total of 965,646 vehicles during this period, lower by 18% compared to the same period previous year. Sales in the domestic market stood at 905,015 units, lower by 17.8%, and exports were at 60,611 units, lower by 21.9%. During the period, the company registered net sales of INR 436,035 million, lower by 20% compared to that of the same period previous year.
Net profit for the period stood at INR 30,626 million, lower by 29.7% compared to that of the same period previous year. We are now ready to take your questions, feedback, and any other observations that you may have. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Good afternoon, and thank you for taking my question. My first question was for Ajay. You had earlier talked about how volume is one of the key drivers for margin performance. Now, sequentially, our volume increased by more than 26%, but our operating profit has largely remained flattish. Can you please help us understand with the margin what happened during the quarter and what within that can reverse in the coming quarter?
Yeah. As I mentioned in the opening remarks, one of the deterrents to us this time was a significant increase in the commodity prices, and the uptick doesn't seem to stop. I think some impact of that will be seen in the 4th quarter as well, and we are now working to see what is the impact of overall commodity increase. This quarter saw an impact of almost 300 basis points on overall commodity increase, which was large, and there was no pricing action that was taken by us in the 3rd quarter. That was largely the reason for the flattish. There was some play of operating margin. In spite of a 3% commodity increase, our operating margin was a shade better than Q2, which was largely possible because of the operating leverage and a few cost reduction initiatives that we had taken.
Largely, the reason is the commodity price increase has kind of kept the margins at the same level as Q2 of this year.
Got it. Just to follow up on that, based on the current spot price, how much of incremental commodity cost is yet to impact our P&L, considering the price increase which we have already taken this month?
As you know, we follow our quarter lag on commodities. Really, the impact of quarter two has come in quarter three, and the quarter three impact will come in quarter four. Commodities, unfortunately, the precious metal continues to see a rise, and especially metals like palladium, rhodium, and platinum, which are now the consumption where it is going up because of the BS-IV to BS-VI shift. That is one area of concern. Second, of course, is that of late, the steel manufacturers have significantly hiked the input costs. That is going to be the other factor. We are at the moment trying to compute in terms of what the impact would be in the 4th quarter and thereafter, but it is very difficult to say at this point in time. There will be definitely an impact of commodity in the 4th quarter.
Got it. My second question was, what would be our strategy to manage these cost inflations, the cost efficiencies, as well as price increase? How essentially we are going to look at the balance between the margin performance and the price increases?
I think we will have to keep a balance between the market and the pricing action. We'll have to see how the demand is. While on one hand, we are reducing, we have reduced sales promotion over what we had in the previous year, so that's helping us. We have also taken some pricing action where we have moved our prices in quarter four. I think it will be effective end of January. There will be some impact of that that we will see in quarter four. However, we'll have to continue to gauge in terms of how the commodity cost moves up, and therefore, what are the actions that are required internally in terms of cost optimization further.
We have also looked at our supply chain very closely and looked at what are the other methods by which we can offset the commodity cost by various other initiatives that we can take up. That work is on at this point in time.
Got it. I have no questions. I'll fall back into queue. Thank you.
Thank you. The next question is from the line of Raghunandan NL from Emkay Global. Please go ahead.
Thank you, sir, for the opportunity. A couple of questions. Firstly, on the replacement demand, are you seeing signs of recovery, and what factors do you expect to drive a recovery in this segment? Secondly, with the congratulations on the Jimny launch, when can this model be expected to be launched in India? Also, sorry for squeezing the third question, do you see any indications by government on possible hybrid vehicle incentives or CAFE norms postponement? Thank you so much.
Yeah, thank you for the question. On the first question on the replacement buying demand, we have seen a sharp fall in the replacement buying demand from about 26% last year to around 19% this year. There has been a sharp fall of about 7%, even 7.2%. It has not really changed in the last quarter. I guess this is because we still find post-pandemic people are upgrading their vehicles a little less and holding on to their vehicles a little longer. That is also borne by the fact that the average age of the vehicles coming into the True Value for our vehicles, for the pre-owned cars, has gone up by almost 1.2 years from 8 years to 9.2 years. I think the replacement buying is still not bounced back.
Although I suppose within much better sentiments on the COVID front, I would expect it to bounce back again to around that level of 24%-25% going forward. On the second question of the Jimny, the Jimny, as Mr. Seth said in his opening remarks, has been launched for the export markets, and we are currently evaluating whether the feasibility of it being launched in the domestic market. As you may recall, we had shown this Jimny at the Auto Expo in February 2020, and we got some really nice response, and we are currently studying the various aspects of the marketing as to when, if at all, we can launch that vehicle in India. On the third question about the CAFE norms and the postponement of the other permission norms, I would request Rahul Bharti to maybe touch on it.
Sure. Sure.
Thank you.
Thanks, Shashank . You asked about hybrid taxation. I think the realization and the awareness is gradually growing where because of limitations of charging infrastructure, we need some other technology which is immediately scalable and which does not depend on charging infrastructure and still brings down CO2 to a large extent. We are continuing in that information exercise. That is one. On CAFE, we are in discussion with the government, and I think the government should take into cognizance all the entire context of COVID and other issues in the auto sector, the economic impact of regulatory stringency. We will wait and watch government reaction on this.
Thank you, sir. Thank you so much. I'll fall back in the queue.
Thank you. The next question is from the line of Kunjan Pichiani from JP Morgan. Please go ahead.
Yeah, hi. Thanks, team, for taking my questions. Two questions from my side. Firstly, we hear a lot about the shortage of steel, semiconductor, not just in India, even from the global OEMs. If you can just talk to us, talk about, is there any challenge we can face, you anticipate in the next three, six months due to these shortages?
There is a clear and distinct risk, but so far, we have not been affected, and we are monitoring the situation month to month, week to week. In case there is any fear of disruption, we will inform you.
Okay. On the semiconductor, as of now, we don't anticipate any.
So far, we are not affected, but we are monitoring, for example, the next month, the next two months, the next few weeks. So far, we are doing fine, and we hope that we should be able to run our line without any problem. It is a distinct risk. Many other auto manufacturers have been affected.
Yes. Okay. Okay. The second question was on the demand side. I mean, you did point out the risk of the macro and all, but can you just share more color on what are we seeing in terms of retail demand over the last post-year-end sale? What kind of order backlog wait periods are there? If you can give some sense, is there any order backlog that we are carrying? Because inventory, clearly, there are situations of stockouts in the market. If you can talk about that.
Yeah. Thank you for the question, Gunjan. Yes, the post-festival demand has actually been better than expected. After a very high festival demand, we were thinking that there would be a sharp fall, but there has not been a fall. In fact, at the moment, we have a pending backorder for about 215,000 vehicles. I think going forward, we would have a situation where the demand is chasing the supply because supply at the moment, our stock levels are quite low. In fact, we started January with a very low stock, both in the factory as well as in the network. The network stock was around.
Can you specify the inventory level?
I will do that. The factory stock at the beginning of January was around 21,000 vehicles in the network, and the factory stock was about 700 vehicles.
Sorry, the channel stock you mentioned, did you mention about the channel stock? Maybe I missed it.
Yeah. That's what I call the network stock. The channel stock was around 21,000 units.
Okay. Just last question from my side, if I can squeeze in this price increases that you spoke about. I mean, I understand we can't calculate what is the impact for this quarter four on the commodity, but the increases, the price hikes that we have taken in January, does that give us comfort that the inflation that we saw in Q3 has been largely offset? Or even there isn't cost absorption flowing through from past quarter as well?
As we said, the inflation on the kind of commodities is pretty steep, and we talked about a number of 3%. We are taking a collaborative call in terms of how much price increase we can do and how much of it should be absorbed by other means. We are working on other measures. Whether we will be able to fully contain it is a difficult question to answer at this point in time, but we are internally definitely working on not only the price increase measure, but also the other measures that we can take to ensure that the impact is minimized.
Okay. Got it. Thank you so much, sir. I'll fall back in Q.
Thank you. The next question is from the line of Jinnesh Gandhi from Motilal Oswal Financial Services. Please go ahead.
Hi, sir. First of all, can you share some numbers on discounts, export revenues, and goods reproduction?
Discounts for this quarter were at INR 20,185, and export sales INR 1,318 crores.
Okay. And Gujarat reproduction?
We are at an annualized level of about INR 500,000, and we are at peak capacity.
Okay. Okay. Secondly, with respect to if I look at the demand environment, it continues to be fairly robust, and we have waiting lists for almost a month and a half or so, if not more. It suggests that the demand environment is conducive to take price increases. Any reason why we are not taking reasonable price increases to offset cost inflation, or do you see any fragility in demand even now?
Yeah. In fact, that's the question which finance people often ask us. We have to walk the fine line between the demand as well as the financials. I think we were coming off from a very bad Q1, and we still are not very sure about the COVID sentiment part because, as you know, while the overall auto industry has seen a month-on-month improvement in the last five, six months, in fact, Q3 has been pretty good, as you just saw the numbers. Remember, if you compare it with two years back, we are still off. In fact, probably if you see April-December figures against the year before last, we are still about 33% off.
I think while there is obviously a sense of relief and even, I would say, a little bit of elation for the last three, four months, the way month-on-month has progressed, that we need to be careful and not overdo one thing, suppose the height of the price too much, then we may be compromising on the demand. On the sentiment side also, we are still not sure on the COVID part where we can have it depends on how the COVID pans out. Looks like better sentiment at the moment, but we can't be really sure. That is the reason why we have not been able to increase the price more than what we have done so far. Thank you.
Okay. Okay. And Sir , cost, we have seen a sharp increase on Q2 basis. Is that entirely linked to production, or are there any one-offs?
Largely, correction increases are a part of the fact that in the first half, we mentioned that we had not factored any increments, and we only gave increments in the second half to employees. That was one reason. Second is that there is also a one-off in the sense that we had to make some provision for retirement benefits because inflation has come down. That had to be accounted for. How much was that? About INR 200,000,000 kind of thing is one time where we had to make additional provision for retirements.
Thank you. Any other question, Mr. Gandhi?
No, I'm done. Thanks.
Thank you. The next question is from the line of Mr. Kapil Singh from Nomura. Please go ahead.
Yeah. Hi, sir. Just to talk about the evolution of technology, how Maruti Suzuki is thinking about it in terms of hybrids and electrics. Where do you think or when do you think you would start launching some of these new technology vehicles?
Yeah. For EVs, of course, you must be aware that the entire industry is quite excited. At some point of time, the transition from ICE vehicles to EV would happen. At the moment, there are three major constraints which are affecting.
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Yeah. Regarding the question on EVs, the entire industry, as you know, has been discussing this transition from ICE to EV. I suppose it is going to happen at some point of time. At this moment, the adoption of EVs is minuscule, globally just around a couple of percentage. Actually, the factors which have sort of hampered this EV adoption are three. One, the current battery technology makes the cost of acquisition of EV vehicles very high. Cost of battery, as you know, is almost 50% of the cost of the EV vehicle. Second, the infrastructure for charging in our country is really small and maybe requires a lot of development before this adoption happens in a big way. Third is, on the consumer part, our research shows there is a high amount of range anxiety.
That is how much kilometers the car will go on a single charge. Besides, as you know, in India, the parking, unlike in Japan or the U.S., where 85% of the cars are parked on the same spot every night, in our case, it is just the other way. Just around 12% cars are parked at the same spot every night. Those are the hampering. What Maruti Suzuki has been saying is that the path to electric vehicles in India will probably be through the hybrids. Also, because most analysts have been telling that the adoption in India would be around maybe 7%-10% in the next five, six years, which means that a large number of ICE vehicles will be produced. We need to do something about the emission for those vehicles.
Therefore, we believe that the path to that, finally converting to EV, will be through hybrid and also the use of alternate fuel types like CNG. That is what we believe is going to be the path to electrification in India. That is also one of the reasons why we have been saying that maybe the support of the government for hybrid vehicles should also continue in the future. This, we believe, is going to happen in the next few years regarding the electric vehicles. As far as Maruti Suzuki is concerned, we are looking for volumes. We are looking for a sustainable business model rather than just an exhibition of technology, as some companies may have done. Thank you.
Thanks for the comprehensive answer. Thank you. One question to Ajay, sir. Sir, can you talk about the evolution of costs from where we are right now? What are the pushes and pulls, discounting, marketing costs? Where are we right now? Are we at the lower end, middle in terms of where do you see them over the next year?
Right. The cost structure depends on many factors, and one of them is how fast we are expanding our capacities. It will depend on demand outlook and our capacity expansion plan. I had earlier also mentioned that in the past couple of years, we have been in the phase of putting up more capacity, which means that as and when we start utilizing full capacity, we will find full benefit of the fixed cost. In the interim, you might see a little hangover of the fixed cost because there could be some underutilization of capacity. When you initially set up a capacity, you cannot fully utilize it in the first year. It takes about a couple of years before you start utilizing the capacity. That is one important ingredient of cost.
If the demand continues to be the way it is and capacity utilization gets better, obviously, there will be some play of the operating leverage that you would see. That's one. Marketing costs have been this year, we have been very conservative. We have not spent much of the marketing cost because of COVID and also because we were optimizing costs in all fronts. We did that. I think moving forward, we cannot afford to not do our marketing bid because that's a cost not for the immediate period, but for future. I think that's something that will definitely increase. How much will depend on what are the initiatives that we intend to take in the area of marketing and sales. I think that's something that would see an increase on the levels where we are this year.
This year, definitely, we have not spent much on the marketing area. We continue to focus on all other areas of cost in terms of productivity gains, in terms of optimizing, in terms of digital initiatives that we have taken this year. How much can we reduce our cost by? I think these are some of the measures by which we will continue to greatly focus on the areas of cost. We will spend where we think it is necessary to spend, which is likely a long-term plan for us. Wherever we think that we can avoid or we can have some better methods of saving costs, we are working on that, and we will definitely ensure to save costs. Directionally, I would say, one, operating leverage when capacity utilization is much better. Second, in all other areas, we will try and optimize cost in marketing.
Also, we will judiciously spend. Given the fact that in future, we will have more models coming in and digital initiatives are becoming more and more in our company, I think that cost is bound to go up from where we are today. That's broadly the sequence of our cost structure.
Thanks, sir. Thanks for participating.
Thank you. The next question is from the line of Pramod Kumar from Goldman Sachs. Please go ahead.
Yeah. Thanks for the opportunity, sir. Just to begin with, two housekeeping questions. What is the blended price hike what you've taken in January? Also, what is the royalty rate for the 3rd and the 2nd quarter, sir?
The royalty rate this quarter was at 4.9%. In the 2nd quarter, it was 5%. She had lower than the 2nd quarter. On the other question that you asked about.
Blended price realization.
Blended?
Blended price hike.
Blended price hike. We do not have an immediate answer on that, but it will depend on various models and various variants, etc. Based on that, I think the price increase that we have indicated in the market is at the ex-showroom level is between Shashank Srivastava.
Up to INR 34,000.
is up to INR 34,000 including the taxes. You have to remove the taxes to see the basic impact. INR 34,000 is the upper end, but I think it starts with INR 4,000-INR 5,000 to INR 30,000.
INR 6,000 to about INR 34,000.
Model to model it is.
Model and variant-wise will differ. To give you an exact percentage in terms of what will be the impact, we will come back to you. We do not have that data immediately with us.
No issue, sir. A follow-up question to both the royalty and the price increase is that the first one is to Shashank, sir. Given that financial penetration would be on the rise given the increase in cost price post BS-IV to BS-VI and all of that, and because of COVID as well, how is the customer reaction to the recent price hikes? Have you seen some bit of a hold-up on conversion or anything like that?
The reason I'm asking is that if the equity contribution from the customer remains more or less the same and the incremental price increases can be financed by EMIs which will not pinch them given the current interest cost, is there a thought that probably the industry can afford to take more price hikes in this cycle as compared to historical cycles when rates were high and the financing dependence was actually not that much? How's the company looking at the data and thinking about this, sir?
If you look at the data on the financing on retail side, the percentage hasn't really changed much. It's remained at that 80% or thereabouts across the different months so far post-pandemic. Even before the pandemic, it was roughly the same. As regards to the other thing of whether the conversion itself has come down, as you know, we have 215,000 bookings which are pending, and we haven't seen that conversion falling down at the moment. In fact, fresh booking flow has also been quite positive. As you rightly pointed out, probably the effect would be seen a little later maybe, but we have to wait and see because it's just been a few days, actually. We increased the price, I think, from the 18th of January. It's been a very few days that we have seen.
In any case, we have a lot of pending bookings where consumers are waiting to get delivery for their vehicles.
Shashank sir, the reason I'm asking this is if you look at a category like two-wheeler, and most, if not all, most of your customers who buy a car are invariably already having one or two or multiple two-wheelers in the household. Two-wheeler prices have gone through the roof in the last one year or so. They've increased, in hands and double-digit kind of a number, right? Car prices haven't actually increased that much in the last one year, at least because of BS-IV to BS-VI. In such high inflationary environment where across categories, be it durable, every category is seeing massive price hikes. Can't that be the opportunity for the car industry to kind of at least pass through the cost burden to the consumer?
Given the fact that 80% customers opt for financing, the incremental cost burden for them in terms of EMI may not be that kind of a deal-breaker aspect. Because a lot of pricing in the industry will depend on how you behave as a market leader. I'm just thinking, and if you look at other categories, prices have really gone through the roof. Premium category demand has not got affected in motorcycle, for example, right? Is there a thinking that whether we should probably look at it from a fresh perspective and probably at least pass on the cost, which is kind of going to probably sustain for longer because that's the feedback generally from the global commodity expert, that this will not go away in a hurry, the kind of prices what you're seeing on the commodity side?
Yeah. You're right. From a financial point of view, clearly what you are saying is correct and logical. I think Goldman Sachs is quite an expert on that. If you look at the other side of the demand perspective, then I did mention that we still have a long way to go in the compare with demand two years previous to the current one. We are still about 33% off from those highs. I think we still have to maintain that fine balance of top line and bottom line. I know you guys look more at the bottom line, but we are also having to look at the top line as well.
I think the price hike, if you were to pass on the entire cost of the increase in terms of material cost and other costs, I'm sure you would see the demand evaporating quite a bit. That is the why. Of course, it's just an estimate. We keep making that assessment and try to maximize looking at both the top line and the bottom line.
Sir, last one is on royalty. We have moved to this dynamic royalty regime some time back. I just want to understand, given the surge in volumes what you're seeing and royalty, a lot of these milestones are linked to the model performance and the model volumes. By when do you expect the benefits of such massive hike in volumes kind of accruing in terms of lower royalty? That is one cost reduction which could probably accrue to the company. Especially when prices are going up, Suzuki gets the benefit of a higher royalty payout without much kind of incremental work. Can that be a bit of a cost question for us incrementally? If you can just throw some light on by when do you expect royalty rates to start easing a bit?
As we had said earlier, that royalty, there are two linkages now that all the new models will move to the Rupee formula. Quite a few of them have already moved to the Rupee formula. By the year 2023-2024, virtually 95%-96% of the models would have moved to the Rupee formula. That is one leg. The second leg, of course, is if the volumes pick up, then there is the second element of beyond certain volumes, there is a discount that kicks in. That will also kick in. Definitely, as we go along, there will be no uncertainty with respect to any exchange variation on account of royalty. That will go away, and there will be a fixed amount that we know we will pay. Second, of course, is the volume discount. Both will help.
It will depend on what is the volume growth and how many models move in the discount category. One thing we are very sure of is that 96%-97% models will move to the Rupee category. That itself will help. The volume discount will further help.
Thanks a lot, sir. Best of luck. Thank you.
Thank you. The next question is from the line of Binay Singh from Morgan Stanley. Please go ahead.
Hi team. Thanks for the opportunity. Just a few follow-ons from a previous question. In one of the responses, Mr. Seth stated that the key driver for margin expansion will be operating leverage. Could you expand a little bit on that? Because when you look at the December quarter, it seems that you're already running at very high capacity utilization. The incremental operating leverage should be very low in the business. Could you expand on, is my understanding correct?
Yeah. I was largely referring to it from a cumulative nine-month perspective. Definitely, now we are reaching that level of capacity. Based on that, I think the kick-in in the operating leverage is visible now. As you see, the overall cost has dropped in spite of a 3% increase in commodity prices. We have been still able to maintain margins and slightly better the margins. That itself means that there is some kick-in of the operating leverage. Otherwise, the margins would have been much lower. That has already kicked in. What I am also trying to say is that when we expand capacity subsequently, there will be periods where, till the time we use the capacity fully, there could be some overhang of fixed cost, which will eventually come down once the capacity is fully utilized.
As we go along, if the demand continues to be robust and we need to expand, typically one year you don't utilize the plant fully. The second year you start utilizing the plant fully. There can be some play of cost at that point in time. If you compare this full year, obviously in this full year, the capacity utilization would be not more than 70%-75%. I was comparing the full year and not just the quarter. If next year you compare the last year, definitely you'll find the operating leverage there.
Thank you. Secondly, one of the comments that the team made is that the replacement market share has come down quite sharply. Is that for Maruti or is that for the industry? Because we've also seen Maruti losing market share in SUVs where typically there should be higher replacement segment. Is that number that you shared for the industry or is it Maruti-specific, the 26 to 19?
Yeah. So that number is similar for both industry as well as Maruti. You were right about the SUV. If we see the passenger car, then our market share has actually gone up as also in the C segment, which is the van, gone up substantially. Also in the MPV. You are right, it is in the SUV category that we have lost some amount of market share. As far as the type of demand is concerned, first-time buyers have gone up 5%, and the additional car buying has also gone up a little bit. So additional and first-time car buying has gone up, + 5% and + 2% respectively, and - 7% for the replacement. That trend is similar across the industry.
How much is first-time buyer now? It used to be 40% plus. Where is it today?
It is, as per the current data which we have, it has gone up from about 43%, 44% to between 48% and 49%.
We obviously in the media articles see a lot of news flow on Maruti and Toyota working on SUVs or Jimny coming to India. What do management comment? Because if you look at last five years, Maruti's ASPs have largely been stagnant. That also has been a drag on the EBIT performance of the business. Is the company focused on, so does the company track ASPs or is there anything that you are doing in the SUV space that we should see better market share going ahead?
Yeah. On the product side, I'll not be able to give any forward guidance. That's our policy. We will not be able to give you the specifics. As regards the SUV space, on the entry SUV, we are the market leaders with the Brezza. Also, in the mid SUV where we have one vehicle, which is S-Cross, which sort of has underperformed in the market, we are just trying to shore up the volumes in that segment also. That segment is also pretty big, as large as the entry SUV in the market.
Not model-specific, but is it fair to say that SUVs will be one of your key focus areas in future model launches?
Listen, we keep monitoring how the segments are moving. You are right on the SUV front, which is just about 26% last year, around 32%-33% this year. We are expecting it to go up to almost 36%-37% in the next four or five years. Yes, we keep watching it. As regards to what products to bring and in which segment, we obviously discuss and then take a view of what is possible and what would be beneficial to Maruti Suzuki in terms of market share. As you would have seen when we introduced the Swift a long time back in the A2 Plus segment, as also the Baleno and the entry-level Brezza in the entry SUV segment, Ertiga in the MPV segment.
Our past record is that we keep watching for those white and blue spaces and try to see if we can improve our volumes through introduction of relevant products.
Right. Lastly, could you comment a little bit about this memorandum of understanding that there's a change that you've come out with on BSC? What is the thought behind that?
That memorandum of articles which you are referring to, it was made in 1981, I think, about 40 years back. It did not have that element of specific digital platform and sale through those platforms. As you know, the last few years, with the penetration of the internet and change in the consumer behavior, we have seen a huge change in the consumer buying process behavior, and people are preferring a digital route. That is the reason why we have strengthened our digital platform. In fact, after the pandemic, it has become even more accelerated. We have introduced some very class-leading programs under this digital platform, including the e-finance space, the marketplace. There are also the subscription service, the sale of accessories, the sale of spare parts on this platform. We are also going to introduce the true value, the used car thing on the digital platform.
All this has made us realize that we need to change our MOA to incorporate some of these activities which we are doing and will be doing in the future. That's the reason for the change which you have just mentioned.
Okay. Great. Thanks for the responses.
Thank you. The next question is from the line of Pramod Amthe from InCred Capital. Please go ahead.
Yeah. Hi, sir. A couple of questions on this digital initiative which I've taken. Is there a fair way to assess the conversion rates in this digital? Do they vary drastically between Arena and Nexa? How do the incremental financing option which you are giving on the digital, do you expect that to improve the conversion rates here?
Yeah. So conversion ratio in digital is different. Overall, of course, the conversion ratio varies between 12%-13%. For digital, it's lower. However, the digital inquiries, as a percentage of the total inquiries portfolio that we have, have increased substantially from just about 3% in 2016 to 15%-16% last year. This time, it's almost close to 55%. While the conversion ratio for digital inquiries is still less, we do find that the number of inquiries as a percentage coming from digital platform is almost tripled. That, in a sense, gives you an idea of how the digital inquiries and the consumers are inquiring more and more, researching more and more through digital platforms. That's the one which we are trying to catch with our process change. As regards to the e-finance thing which you have referred to, we just started it.
Actually, we began it with Nexa as a test case in a few cities with a few dealers' cities. We are now just a few weeks back, started on the Arena as well. We will be adding more banks in that e-platform. Therefore, with this short period of time, it's done very well. I would say the level of conversion is slightly better. However, we need to see over a period of time how it performs when we expand it to the other cities as well as completely the entire Nexa and the Arena channels.
Sure. Thanks. The second one is with regard to your product launches. Do you see structurally the way the digital you can use? Do you think the launch expenses and hence your capability to launch much, I would say, wider product range would be possible now versus what you might have thought three years back? Any thoughts on this?
Yeah, certainly. Actually, digital allows, as you said rightly, lower expense maybe for the same amount of reach or frequency. Of course, it has its own drawbacks as well as the positives which you mentioned. You are right, we can actually reduce the expenses of the launches through digital. In fact, the last launch which we had was the S-Cross, a BS-VI 1.5-liter petrol, as you know, in August, which was done entirely on the digital platform. There we got extremely good response. Also, the fact, not only was it less expensive, but also we could manage a lot of personalization on the messages to the consumers. That, I think, is the great positive of digital.
Thanks, Andolubis.
Thank you. The next question is from the line of Satyam Thakur from Credit Suisse. Please go ahead.
Good afternoon, everyone. Thank you for taking my question. Firstly, could you share, you mentioned that there was some impact on margins sequentially in this quarter also because of the factory inventory sharp correction that we saw. Could you help quantify how much was the impact on margins because of that? This would largely be expected to reverse going ahead as the factory inventory normalizes, right?
Inventories were low even in the second quarter. They were not very high at the factory. Yes, it was a bell down. I think we were roughly at negligible inventory in the third quarter then. The impact, which was because of that fixed cost incidence, was about 0.3%. That 0.3%, depending on the inventory levels, will get reversed or may improve. That will depend on what the inventories are at the end of quarter four.
Okay. Thank you. Secondly, on the Jimny, incrementally, I mean, till the time we launch something in India, in the domestic market, the volumes on exports could be quite low. How should one think about profitability on this model with this kind of volumes? Will it be much lower on profitability, or will you price it appropriately to kind of keep profitability similar? Secondly, is the volumes currently, if one sees what is the kind of sales Jimny does in these markets, Middle East, Africa, and Latin, that seems quite small. One believes that there is a lot more potential because apparently there is a big issue on supply of Jimny at this point of time because of the high demand in Japan.
If any sense, if you can share on what could be the potential volumes that we are looking at in these markets.
We have just started the export of Jimny. We need to go further into time to understand how the business is, what kind of volumes we are able to get. As of now, it is a small addition to our exports. In our overall volume, the fraction would be even smaller. How much it impacts, I think we still need to take some time and understand. Overall, it is not in terms of volume percentages, it is not very high.
Would we be limited to these three markets, or can we also export to Europe at some point?
As of now, we have started in some markets. Europe has a lot of regulations. Almost every export to Europe keeps stopping every about four or five years because of some new non-tariff barrier or some new technical regulation that they bring in. As of now, Maruti is not exporting to Europe. We will see as it goes along.
Okay. Thank you and all the best.
Thank you. Ladies and gentlemen, due to time constraints, that was the last question for today. On behalf of Maruti Suzuki India Limited, we conclude this conference call. Thank you for joining us, and you may now disconnect your line.