SUZUKI FAN

Below is a verbatim transcript of  Maruti Suzuki chairman RC Bhargava  interview with CNBC-TV18’s Latha Venkatesh and Anuj Singhal.

Q: You all have had a fairly strong first five months of the year. Is that what is inspiring the confidence for capacity expansion? Give us some details of what is on the anvil?
A: That’s not the reason because this has happened now. We have been seeing that since last year the Indian car market has been growing strongly. All the factors seem to indicate that both the economic growth and along with the growth of the car industry will continue at a fairly high rate in the coming years. That is why we had gone ahead with our second line which is now under implementation and which will get commissioned at Manesar in the second half of 2011-12.
What we have now got also is in-principal approval from Suzuki Japan, to go ahead and take up in the board the approval of the third line also in Manesar. This will mean that the second and third line which will come up in Manesar, will add half a million cars of installed capacity.
Usually we expect that with half a million installed capacity, our people will ultimately produce 600,000 to 650,000 cars out of that. That is to take care of possible increases in capacity. At the same time as Mr Suzuki mentioned, the first original line in Gurgaon has gone quite old now and the time is coming when that one will be required to be scrapped and a new line built.
Whilst that happens then we need some surplus capacity from somewhere else otherwise we will run short of capacity again. That’s the other factor which is driving this. We also came to the conclusion that doing civil work for the third line along with the second line, was in all ways the right solution, both in terms of cost as well as in times of keeping dust and other levels down. So there is a technical reason also.

Q: Can you give us some kind of a timetable? How much of excess capacity comes in when the second line goes into operation in the second half of next year and what is the capacity that the third line will add? Would 2012 be the year when you will have this entire half a million capacity coming in?
A: We don’t know the exact timing yet because while the civil works are being started and they will be ready quite soon after the second line is commissioned. The board has yet to approve the third line and then the orders for equipment have to be placed. We have to check with the order and the suppliers as to what is the delivery time they will quote to us. There is a little bit of uncertainty there but usually I would expect that probably by the end of 2012, I can’t predict the exact time but something around that time.

Q: Right now your sales rate is about 100,000 units per month and your capacity is about 1.2 million. You are almost running at peak capacity. When this new line comes in what could be the sales guidance in terms of volumes per month. Would it increase significantly going by the demand situation right now?
A: This will increase our capacity by 250,000 a year, but it’s still a full year from now before we even start on getting anything out of this line. It will be only early 2012 that all the facilities will get completed. Now there will be a growth in this period which could be anywhere from 12% to 20%, I don’t know what the growth will be. The existing 100,000 per month will any case go up to something like 115,000-120,000 in one year’s time.

Q: Rs 1900 crore is not a great deal of money especially if you have a timeline of over a year. Any plans of how that money is raised? Is it internal accruals only?
A: We have at this point of time over Rs 7,000 crore of cash available with us and we add something close to Rs 3000 crore a year of internal resources every year. No, we will raise nothing from outside.

Q: Do you think this will become the catalyst for more such expansion news that will come from others in the industry as well. After all capacity constraint is there and especially among the components makers. Do you see this generating some expansion announcements in the component industry at least?
A: The components industries must take note of what we are doing and expand along with us. Otherwise there will be problems. If we create half a million extra capacity in the next two years and this doesn’t happen with the component manufacturers then there is an issue.

Q: One issue which has bothered investors after your quarterly numbers was the royalty issue. There is still no clarification on that in terms of when is that going to end. There was some talk that maybe three-four years down the line, you may actually develop your in-house technology and may actually get royalty from Suzuki. Can you take us through any timeline on that front?
A: What we have yet to work out with Suzuki is that when models are developed partly in India and partly in Japan, then how the royalty will be adjusted to take into account the work done in India. That discussion will take place but as you know developing models in India will still take some time off.
The Rohtak plant at the moment only has a boundary wall. It doesn’t have much more than that. Test track and other facilities are yet to be developed in Rohtak. This will of course happen. It will be illogical if one was to say that work will be done in India but royalty will be paid for that, that won’t happen of course.

Q: For rest of FY11 and FY12 we can assume that the royalty according to what happened in the first quarter?
A: The first quarter had an arrear component in it also. The arrear component has to be excluded because that won’t arise in the future. But the amount of royalty to be paid will depend on the volume of production which takes place and to an extent it will be determined also by the exchange rate.
Q: The yen is becoming an expensive currency?
A: Yes, but I don’t know how the yen will behave in the next 12 months.

Source:  CNBC-TV18’s

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