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Maruti Suzuki India Ltd
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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; Senior Executive Director, Marketing and Sales, Mr. R.S. Kalsi; Executive Director, Corporate Planning, Mr. A.K. Tomer; Senior Vice President, Finance, Mr. Pradeep Garg; Vice President, Corporate Planning, Mr. Rahul Bharti; and Vice President, Finance, 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 will be happy to receive your questions. May I remind you of the safe harbor. We may be making some forward-looking statement that has to be understood in conjunction with the uncertainty and the risks that the company faces. I 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.
Thank you, Nikhil. Good afternoon, ladies and gentlemen. You may be aware that quarter 3 have been an unusually tough quarter for the industry. The result of this quarter have to be viewed in the context of particularly weak market conditions. While SIAM had forecasted a passenger vehicle domestic market growth of 8% to 10% for the year, industry could grow by 4.4% in the first 3 quarters of the year. And decline in the third quarter by 0.8%. The company grew by 7.2% the first 3 quarters and by 0.4% in the third quarter in unit wholesales. In addition, the company helped dealers retail about 90,000 vehicles in excess of wholesale to keep dealer inventories lean as the festive season sales growth was below expectation. Volumes were affected not only due to weak domestic market conditions but also due to issues faced by export markets. Automobile business is highly capital and labor intensive and volume plays a critical role, especially in a growing market where the business planning is expansion-oriented. When the business planning is done, assuming some growth, all growth-enabling expenditure increases proportionately. If due to reversion in market demand the volume does not grow, the impact of increased expenditure is visible in balance sheet performance.Besides weak market conditions, this quarter was also marked by several other adverse factors. The commodity prices and foreign exchange movements were also adverse during the quarter. During the quarter, the company sold 4,28,643 units, lower by 0.6%. The company registered net sales of INR 1,89,264 million lower by 0.1% over the same period, previous year. The combined effect of decline in volumes had its clear disadvantage, higher sales promotion expenses, adverse foreign exchange movement, and commodity prices impacted the profit for the quarter. Cost reduction and higher nonoperating income would partially offset the negative impact. Net profit stood at INR 14,893 million lower by 17%. While Q3 financial year '19 was an exceptionally challenging quarter for us, it will be our constant endeavor to enhance sales and improve productivity and efficiency in the future. The company has launched 2 new models, Ertiga and WagonR, to create excitement in the market and bring volume growth. Both these models have been received well in the market. Ertiga has been in waiting list since its launch. The company also announced price increase across models to pass on some cost impact. We can now take your questions, feedback, and any other observation that you may have. Thank you.
[Operator Instructions] The first question is from the line of Pramod Kumar from Goldman Sachs.
Sir, if you can throw some light on the recurring and the nonrecurring nature of expenses related to the ForEx side? Or rather, whatever is the ForEx-related expenses, which is pertaining to the previous quarter which you have accounted for in this quarter as part of the royalty payout or as part of the vendor settlement? That will be the first question, sir.
So, see, there is only one exception that I've seen this quarter that we had to make certain provisions for leave encashment and retirement benefits because we have done a resettlement, and that has an impact on the past services as well. So there was a provision made on that account, which is about INR 48 crores. So that's the only item of exception that I've seen this quarter.
And the ForEx-related adjustment pertaining to previous quarters on account?
No, they're virtually negligible.
The next question is from the line of Ashish Nigam from Axis Capital.
Sir, this Q-o-Q margin fall of 500 bps, can you quantify how much is commodity? How much is currency? What is the discount? And how much would be operating deleverage?
Yes, if you compare it with Q2, you find that the net sales have come down. So other expenditure, if you say on an absolute value, it is down by INR 100 crores as compared to Q2, but as a percentage of net sales you'll find it up by 1.5%. So that's the reason of volume versus the nature of expenditure. Other than that, commodities compared to year-on-year had an impact of about INR 300 crores. And effect of foreign exchange rate is roughly about 0.7% on the margins.
And which of these cost pressures reverse in Q4 or Q1? So firstly, what's the price hikes we've taken early Jan? And does that cover at least part of this 500 bps margin fall?
So there will be a combination of factors next quarter. One, of course, the price increase that we have taken will help us in the -- in Q4. We also are seeing that the commodity trend is now reversing a little bit, so we may see some respite and advantage coming out of that. Discounts this quarter were also all-time high. So I think we will be at much lower discounts compared to where we were in the last quarter. So I think all -- combination of all these factors would definitely help us moving forward in terms of where we are and where we will be.
I'm just saying because we've typically worked in this 14% to 16% margin band. Is there a rethink of this -- of that band?
As we said that this was an exceptional quarter. And all the negatives came to us so in this quarter, we had impact of foreign exchange, we had impact of commodities. We had also a very high sales promotion because the retails were very high and therefore, it's clearly visible on the wholesales. We also had, as I mentioned to you, some impact on the employee costs as we had one wage settlement done; and second, we had onetime gratuity and leave encashment where we had made a provision of about INR 50 crores. So all these impacts are reversible, some of these impacts will have to be seen in the light of external environment and market conditions.
Just one more question, if I may. There's this one line in the presentation which says, higher costs in resources and capacities, which you earlier planned to enable the higher estimated growth. What does that mean, is that the higher fixed costs at SMG or how do we see that?
No, no. I think the point that earlier my colleague was making was that if you planned certain growth and that does not happen, your fixed cost does not change. So, therefore, there is operating leverage disadvantage that you have in that particular quarter. So this particular quarter that happened, and we had this disadvantage of operating leverage. Had it been higher sales growth, you wouldn't have seen growth in the -- as a percentage of overheads, that 1.5% that he mentioned.
The next question is from Amyn Pirani from Deutsche Bank.
Sir, my first question is a housekeeping one. Can you help us with the number -- the discount per vehicle number that you share every quarter?
Discounts this quarter were about INR 24,300.
Okay, okay, okay. And sir, secondly, just going back to the earlier question. So when you're talking about higher resourcing and higher fixed costs in expectation of higher volumes, was it just a quarter 3 temporary phenomena or is it like that if volumes do not meaningfully improve, those fixed cost pressures will continue to be seen in 4Q and next year as well?
So as an organization, we are really glued to the fact that in case, if there are market pressures, we need to -- to very closely look at our cost and productivity. So and if there is a need where we need to cut cost or improve productivity, we'll -- we are simultaneously working on that. So if volumes increase, it will give you the scale benefits. If for conditions of market, it does not go up, then we will work on our cost program in any case.
Okay. And sir, lastly a clarification. The discounts that you mentioned, the number that you mentioned, that number is already netted off when you report net sales, right? Is that understand...
That's right. Yes. That's right.
Okay. So the other expense line, which has also shown an increase in cost pressure that would have what kind of -- like what kind of sales and distribution expenses would have hit you there, if you can help us understand?
As compared to quarter 2, the figure is, in fact, down by INR 100 crores. But if you are saying, year-on-year then, one major reason as we have explained in other quarters is the freight, expenditure and recovery. There's a INR 250 crores freight, which is coming here, so the recovery which is coming in other operating income. So you have to see it in that context also.
The next question is from Kapil Singh from Nomura Securities.
I wanted to check what are the demand conditions that you are seeing now compared to Q3, is there some improvement and also some thoughts on new launch pipeline? Discounting conditions as well.
I think market remains to be under pressure. And a few streaks of optimism which we can see now is that one is that this being election year, so maybe people would be a little bit this uncomfortable in terms of spending, where MSP having gone up, and monsoon had been good, so those -- the benefits of that come over a period of time. That is one thing. Second thing, fuel prices. They had peaked around September, gone up to INR 83 per liter. And now, they have started coming down. But at the same time, again, we see a little northward shift in those prices but still there are lower than what they had peaked at. So that is another maybe line of optimism, but overall pressure in the market continues. The good point is that okay, we have launched Ertiga where we have a good number of bookings. And recently, we have launched the WagonR as well, which has got a very good response from the customers. So with that in mind, I think it's a mix kind of a scenario with a little bit more towards maybe optimism.
So are you seeing positive growth right now in the market or it is still subdued?
See, growth is still subdued.
The next question is from the line of Raghunandhan from Emkay Global.
Actually, continuing the same query on the outlook side. Like for the full year FY '19, how do you see the growth expectations now? And for FY '20, do you think that double-digit growth is possible because there were some media interviews where management had indicated that double-digit growth might be difficult even in the next year?
Well, considering the current situation, you know, we don't give any guidance on future numbers. See, the current scenario is that in the beginning of the year, as Mr. Seth has mentioned that growth projection for the industry was around 8%, and so far, it has been only 4%. And we are at 7% plus. So we will grow more than industry for this year. This kind of a trend would continue for the fiscal year '18, '19. However, if you talk about '19, '20, it'll be a little early to talk about it because we are yet to work on our numbers and put them forward for board approvals and all that. So all we can discuss is maybe macroeconomic parameters in the year '19, '20 and maybe try to draw some inferences where maybe you are as informed as we are here.
Anything you can share on the export outlook? I mean, Indonesia was -- has been a particularly weak market for Maruti.
Yes. Indonesia, in particular, had stopped imports. They have started giving some amount of volume licenses. And the first set of license has been received. But exports in the next year maybe almost flat as compared to this year.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Securities.
Sir, my question pertains to first, on staff cost. I mean if I -- just for this INR 48 crores of one-off, there's almost 21% increase. So is that largely due to the wage renegotiation because considering that Gujarat plant staff costs would not be part of this, so is this inflation something one needs to look at going forward as well?
Is it sequentially that you're asking for? Or is it...
Y-o-Y.
Year-on-year.
Y-o-Y. 21%, yes.
Year-on-year, one impact we have explained is on account of material valuation on account of the wage revision we have done and the impact...
Yes, I'm excluding that -- excluding that to the whole 21%.
Yes. Excluding that, the other impacts are on account of normal increments and normal items. Of course, there is a variable pay provision, which was made in quarter 4 last year. And this quarter, we have made a provision corresponding to that. And last year, the impact had come in quarter 4. So that's the only other item, which is sort of additional here.
Okay, okay. Secondly, you have indicated price increase in Jan. So this will be what, 1%, 1.5% or lower than that?
Jinesh, are you talking about the fourth quarter or...
Fourth quarter.
Fourth quarter. So that will be roughly about 70 basis points.
70 basis points, okay.
70.
7-0, yes.
Jinesh, the figure is 70 basis points.
Understood. Understood. And lastly, would this cost increase also cover for upcoming safety norms or that will lead further price increases?
I think we will have to deal with this element. We keep launching new models, and we have a strategy of doing that. So we will unfold that as and when we launch these models.
The next question is from the line of Sonal Gupta from UBS Securities.
First, housekeeping question. What is the royalty rate for this quarter?
That's 5.5%.
5.5%. And the export revenues, are you sharing that?
It's INR 1,158 crores.
Sir, so just on the retail and the discounting, when you're saying that you're 90,000 more retail in this quarter, so -- and given that when you're sharing the discount number, is this on a wholesale basis on the wholesale or is this on the retail? So in which case I'm saying that given the divergence between retail and wholesale, have you seen a much larger impact as a result of that?
You're right, I think, because in the books, the sales -- the discounts will get amortized over the wholesale numbers, but whereas actually we have done much higher retails. So if you look at per vehicle in terms of retail, it will be much lower.
Okay, okay. So this is on a wholesale basis, right?
That's right.
Okay, sir. And just could you help me with the number for what is the retail growth that you've seen on a year-on-year basis, for the year-to-date and...
9 months, 4.9%.
4.9%. And sir, just last question from my side. I understand the discounting, et cetera, but -- and so if you were -- I mean, still on a sequential basis we've seen a very sharp increase in raw material costs of sales. So even if I adjust for like roughly your discounts have increased on a quarter-on-quarter basis by 5,500, which will give you like on your ASP roughly 140, 150 basis points of increased discounts. And then, so have we -- so -- but your raw material cost of sales has gone up by almost like 300-plus basis points. So is there -- are the rest of the impact all because of -- on a sequential basis, because of commodity and FX, or how do we look at it?
Sequential basis, the impact is on account of change in base. If you see our net sales since Q2 versus Q3 and other expenditure has already -- has, in fact, come down as compared to quarter 2, but since the net sales value is down, there's the impact of 1.5% on the margins. Other than that, it's material cost for net sales.
No. So, sir, I'm asking about the material cost increase on a -- as a percentage of sales, not for the...
There -- clearly, it's on account of the discounts, which we mentioned this quarter because discounts are also part of material cost to net sales and the other impact is on account of commodities.
The next question is from the line of Chirag Shah from Edelweiss.
Sir, if you can help us understand this, incremental 90,000 units that you have sold across line items, what could be the hit on the P&L, because definitely your allocation is far on lower number of units where your sales are actually far higher. And if we have to look at a normalized number, say, where your, generally, wholesales and retail matches, what is the kind of reversal that we can see in margins only because of this mathematic issue? Is it possible to help, because I think that, that is what people are trying to understand over here that, other things equal, can we assume a 150 bps extraordinary impact because of this mismatch between wholesales and retail, or that number could be slightly higher?
What you should look at is the what is the 9-months discount versus this quarter discount. If you look at the 9-months discount, it's roughly about INR 19,200. This quarter, it's about INR 24,300, and you can draw your calculations.
But sir, similarly, your other expenditure would also be -- would have been higher because your spend, your promotional spend, whatever you would have done, would be for incremental 90,000 units also to clear the inventory in that sense. So across the board, what could be the one-off impact that we have seen in this quarter which is nonrecurring?
So your -- some of these impacts that you are seeing, one, of course, is the discount that you saw. Second is portion of advertisement which is linked to retail. That obviously, will get -- will taper down in the subsequent quarter because if -- now you are in a low inventory. And your wholesale and retail matches, then obviously, these costs will come down.
Fair point. Sir, second -- and just a clarification, you indicated that a higher other operating income is because of grossing up of entries, right? Freight cost is shown as a part of your expense, I would say, and as a part of your other operating income because we are seeing a consistent jump in other operating income.
That's the reason, yes.
That's the reason. Sir, is it possible to quantify what is that grossing up amount, which occurs on...
This is -- for this quarter, it's INR 250 crores.
For this is, INR 250 crores. Okay.
Yes.
This is helpful. Okay. And one last question if I can squeeze in. So commodity costs, the reversal, when can we start seeing that because there would be some lag effect in your contract. So we can see the impact in Q4 itself, or it could be slightly lagged?
We are discussing a supply chain to understand the impact now in Q4 but definitely, a lot of commodities have swapped on. But one important thing is that, in our case, it always comes with a quarter lag. So we are hopeful that next year, we might see a leap in commodities. But quarter 4, we are still working out in supply chain to understand what is the quarter lag effect if any and will there be any softening or not.
And similarly, the worst of the FX impact would have been accounted?
Yes. I mean, this is something that you would have to watch on a regular basis. At the moment, yen-rupee is kind of stable, but if there is any other rupee depreciation that can play [ worst ] for us.
The next question is from the line of Ronak Sarda from Systematix Shares.
Sir, again, a clarification. The dealer support which we talked about, INR 90,000 net, that amount is already part of the discount number, INR 24,300, right? Or there's some amount separately sitting in other expenses?
No, no, no. All -- any discount that we've given on the -- is part of the net sales, so it's already netted off from sales.
Sure, sure. And sir, second question was on your currency. I mean, have we accounted for the impact as rupee depreciated to INR 74, INR 74.5 to dollar. So on the indirect imports as well as that impacts seen in this quarter number, or you expect some more ForEx-related impact?
So same way, the impact of indirect foreign exchange -- exposure of FX on indirect imports come at a quarter lag. So what you're seeing in this quarter, which is October to December would have been the impact of the previous quarter. And now the raise that will be prevailing between September to December will apply between January to March. And we take a daily average of the exchange rate to arrive at a blended rate.
Okay. So there's some more impact left, right. And sir, the last question on your Ertiga and WagonR. Can you share the waiting period or the booking amount, booking -- on booking numbers for these 2 models?
Well, we have more than 55,000 bookings on Ertiga and waiting is around say 28 weeks as of now. And on WagonR, and that's the first 10 days of launch itself where we have got more than, this thing, 14,000 bookings already.
Sure, sir. Sir, any production constraint on Ertiga because I'm assuming demand being soft, the waiting period looks pretty high. How was the ramp-up plan here?
No, there are no production constraints. So we will gradually, you know the saying, the scale of the production. Only thing is that there was some void in the marketplace when we are phasing out the old Ertiga. So there were some customers during that phase who were waiting. And of course, new product has been very exciting, so response has been very good on that front. And we'll be able to, in due course of time, scale up the production numbers as well.
The next question is from the line of Gunjan Prithyani from JPMorgan.
Firstly, on the inventory levels, given that the retails have been higher than the wholesales, can you share are we meaningfully lower than the typical 4 weeks or 5 weeks that we manage? How would the inventory levels be at the dealer end now?
Well, in December, we came down to 15 days of inventory and Europe, the inventory build-up was primarily on account of lackluster festival season and our strong preparedness, in fact, for festival season. That's traditionally what we do. But this time because of that the inventory build-up was there, which was slightly unusual phenomena for -- not only for us, for entire industry, I suppose. But generally, we have started on lower inventories, 15 days.
So but in a normal case, how much would you manage on a normal basis?
We would expect our dealers who carry an inventory from 4 weeks to 5 weeks of this thing, our average monthly sales.
So this is how we should -- as we plan our wholesales going ahead, depending upon the demand environment, the levels -- inventory levels should build up in the channel, right?
Right.
The second question is on the commencement of the new plant line at the Gujarat. Now do we anticipate any big cost changes as this happens and starts to reflect from Q4 onwards, particularly that the engine plant also has come on stream?
See, we've always said that till such time that we will have all the Gujarat plants use the full capacity operational, there will always be some fixed cost impact that will come in the quarters or the period till they achieve full capacity utilization. So there will always be some impact. Although now, we have a lot of experience after running the first plant and a lot of cost optimization has been done there as well in terms of fixed cost. But yes, the question that you're asking is right, there will be some impact on account of new plants on the fixed cost.
And just last question, if I may, on the product pipeline. Now, we've had 2 launches already. Now going into F '20, we do have a big regulation change around BS VI, and we'll have to manage the inventory given the deadline for Ciaz as well in the April '20. So how do we look -- approach the new model launches, do we see more launches coming through in F '20, or the focus is going to be around the transition to the new norms?
Well, as far as new launches are concerned, we do not give any guidance on that, future guidance. However, as far as BS IV is concerned, our strategy is in place. This introduction on various models would be in a phase manner. And we will be able to -- we are very much, say, aware of the fact that registration of these vehicles will stop after April '20. So we are planning our inventories and sales accordingly.
The next question is from the line of Sahil Kedia from Merrill Lynch.
Sir, just to clarify again, on the question asked previously. The new capacity or the new line that is coming up and the localization of the Gujarat plant that is supposed to started in Jan. Has that started?
A lot of work has gone into localization, and I think we've achieved levels that we were aiming at. It will take us maybe another year or so to kind of have the desired levels. So, therefore, that impact will also be visible. From the beginning to now, a lot of vendors have moved in there. So that's the situation as far as Gujarat plants are concerned.
Okay. And sir, in terms of your demand trends that we are seeing, are you seeing different trends when you look at urban and rural in terms of your year-to-date performance and so on. Can you help us understand kind of what those markets have been?
Well, if you want to, you know this thing, know about the growth split between urban and rural, I would like to say that rural is going more or less flat. The sales in the city side are under pressure. However, rural markets are growing by 13% compared to flat sales in the urban markets. At the same time, I'll also like to mention this point that the dividing line between rural and urban is fast disappearing. The rural customers, they are becoming as aware of the products, technology, designs as their urban counterparts because of media, Internet, and there were high-end models, stylish models, which are finding a lot of acceptability among rural people. So the dividing line with rural and urban is gradually becoming blurred.
Okay. And sir, your rural contribution is about that 30%, 35%?
Well, currently, it's around 39%.
The next question is from the line of Jamshed Dadabhoy from Citigroup.
Sir, just one question. Could you give us the sales done from SMG this quarter versus the previous quarter?
This quarter, it was about 58,000 vehicles.
36,000.
36,000 in last year. This year, 58,000.
No, sir, previous quarter, second quarter?
Second quarter was 60...
67,000.
67,000.
Okay. So sir, is it right to assume that the deleverage -- operating deleverage that happens from SMG also sits in now your material cost line?
Yes, that's right.
Yes.
Okay. Sir, could you quantify how much that has been this quarter, like ballpark?
Jamshed, we'll come back to you on that.
The next question is from the line of Pramod Kumar from Goldman Sachs.
Sir, first question pertains to the revised industry growth. Given the first 9 months has been significantly off the mark compared to what SIAM was envisaging, where do you think the industry growth will settle for FY '19?
We are told of a figure of 4.5% from industry circles.
4.5%. And we expect to continue to outperform the industry or...
Yes, definitely.
For sure.
For sure. I like that. And on the depreciation side. Sir, the line item seems to have surged a lot. Do I understand that you're not doing a lot of physical CapEx as such at this point of time, apart from the R&D center? What explains this sharp jump on a sequential basis of almost INR 40-odd crores?
We have the implementation of some plant machinery, which happened in this quarter because of this, the depreciation has gone up. So the installation happened in Q3, because of it the depreciation has gone up.
And sir, finally on the say, marketing expenditure per se when it comes to ad spend and for marketing, I don't know if I missed it because I got dropped. How was that trend in this quarter, sir, in 3Q?
Sorry, can you repeat the question, please?
The marketing spend, sir. Because I believe demand was soft so you had to spend more than what you would have envisaged on advertisement, marketing and all of that, right, for the December retail. So just trying to understand, what component was that bit in terms of the surge in ad spends during the quarter versus say sequentially?
Sequentially, the spend on marketing went up by about INR 78 crores.
INR 78 crores. And a lot of this would be fairly back-ended for December to kind of help the retail pick up?
Some of it would be to that -- for that cost and most of it would be for the launch that we had, et cetera, in the quarter went to third quarter. We had the Ertiga launch. A lot of it would have been because of that effect.
And sir, finally, on the consumer sentiment because given that festive season was weak but the industry -- the demand responded very well with a 15% growth in December in terms of the retail to higher promotions, higher discounts. So how do you see the trend of say, customer walk-ins, inquires because if you look at your Ertiga booking numbers, they seem to be very, very encouraging. So I'm just trying to understand, how do you see the consumer trend as in, in terms of whether is it just walk-ins which have dropped or is it the conversion of the final closure which is getting deferred? How do you read that situation, sir?
Well, you see, there is a trend that whenever we launch a new model, the bookings certainly, there is increase. So we got a good pipeline of bookings, particularly when we launched the 2 models in the recent past. So bookings are good. And however, on the sentiment part, the customer sentiment is impacted because a number of small, small factors, slightly hardening of interest rates, fuel prices going up, insurance, he has to shell out close to INR 14,000, INR 15,000 more for a vehicle. So all these factors put together are leading to a sort of say subdued sentiment.
And inquiries, sir, what is that right now as in inquiry walk-ins?
Inquiries are fine. Inquiries are fine.
So just the demand closure which is getting deferred basically.
Right.
The next question is from the line of Sonal Gupta from UBS Securities.
So just wanted to understand because, I mean, a couple of years back we had this situation where we had very high plant level inventory in Q2 and then, in Q3, we destocked and that led to some amount of margin impact. So is there some sort of that effect also on inventory at plant level and then destocking in this quarter, is that something that you can talk about?
No, nothing of the plant level inventory impact. It's not there at this time.
Okay, sir. And just in terms of sir, I mean, just to understand from a discount perspective. I mean, would you say that the -- I mean, obviously, on a year-on-year basis, discounts are up quite sharply but your discount increase would be in line with sort of the -- what you've seen trend in the market and therefore, to be competitive, you had to be at this level. Because where I'm coming from if the overall market was subdued, would it not have been better in terms of strategy to reduce the sort of production and limit the amount of inventory rather than pushing inventory at a high discount. I'm just trying to get a sense on that.
I think discounts were prevalent across the industry. And as Mr. Kalsi mentioned to you that festive season was actually very weak, and then there was a huge build up of inventory. So I think everybody's focus was to push retails. And when you're pushing retails, you are bound to give higher discounts. So it was in fact, the competition discounts were even higher than what we were offering in the marketplace. So discounts are prevalent all across and they were high. And in fact, competition was even higher in some models higher discounts than what we were offering.
Yes, almost 50% more than what we...
Right, sir. So we are still expecting to reach the target of 8% volume for this year?
Let's keep watching the market situation very closely. Our endeavor will be to do as much as we can but as Mr. Kalsi mentioned, the demand still looks a little subdued. But let's see in the near -- next couple of months with the inventory levels that we have with the dealer, we'll do our best to reach the target.
The next question is from the line of Hitish Goel from Kotak Securities.
Sir, just want to understand your raw material cost contracts because your earlier question was also asked on this. If we net off -- if we see a Q-on-Q movement in terms of discounts that explains only 130, 140 basis point of movement. But there's 160, 170 basis point impact because of commodity cost and last 2 quarters, there's not much meaningful increase in steel prices. Actually, steel prices, aluminum prices, everything has declined. So failing to understand how your commodity cost contracts work basically, can you just shed some light on that?
See, steel is mostly 6-monthly contacts or some were quarterly contracts. Aluminum is on a monthly basis. But it often happens that in the market steel goes up, and we are -- negotiations happen slightly late, so the impact of that is felt in subsequent quarters.
Sir, is there any impact because of dealer margin increasing dealer -- you have given some extra incentives to dealer to push sales in this quarter which we are not aware, which is one-off in that sense, which is not part of your discount, yes.
Let me explain this in totality so that you are all clear in terms of what the impacts are, sequentially Q2 to Q3. Commodities impact was about 80 basis points. The indirect import impact was about 30 basis points. Higher sales promotion was about 100 basis points, right?
Yes.
And if you add these, and then there was some cost reduction, which was 30 basis points. And then there is some impact which is coming out of some conversion costs on finished goods end up and work in progress, Q2 versus Q3, which is small. So if you add all this together, this adds up to that 3% that we are talking about.
So sir, basically, that is what I'm asking. This higher sales promotion is over and above the discounts, right? Then only it comes to 300 basis point, otherwise, it doesn't. So if I just say raw material...
Look, I'm giving you a breakdown of 3%, which is...
So that is what I'm saying no, sir -- yes.
Which comprises of sales promotion or sales to discount which is 1%. When I'm saying sales promotion they are discounts, right, that's 1%. About 1% is on account of commodities, okay that's 2%. And about 0.5% is on account of unfavorable exchange rate. And about 0.3% is the inventory adjustment that happened between Q2 and Q3, these finished goods inventory. The impact of that which comes in the material cost is about 0.3%.
Okay, okay. And how is the raw material cost pressures now, it will be -- we will not see the full impact of that in the fourth quarter now or it will happen only in first quarter FY '19 because you have 6-monthly contacts, right, on steel?
I think, see -- fourth quarter, we are still working out the supply chain to understand what will be impact on various commodities. Commodities have started softening, except for maybe impact when it comes with the exchange rate on certain commodities like steel and oil. But hopefully, next year, we should see some relief on commodities. That's my understanding so far as the commodities have shown some softness. But because of the fact that -- the commodity compensation is done at a quarter lag, so we'll have to see what impact will be there in Q4 for commodities which -- with the rates prevalent in quarter 3.
Okay. Sir, my final question, when you're talking about this 15 days of dealer inventory at the end of December, you are taking December wholesale or retail numbers to compute this inventory. You're taking that INR 2,13,000 number for computing the dealer inventory. How is this 15-days window computed?
15 days of our average monthly sales.
This is retail. Average retail sales between April to December.
Wholesale.
That is -- so Rahul, that is between April to December, right, that is average number?
Yes.
The next question is from the line of Rajan from Hedge Wealth Management.
I just wanted to ask, will there be any change in royalty rates going ahead as and when new models are launched?
We've said that all new models as and when they're launched, they will move from the old yen-based basis to rupee formula. So the model that we've now recently launched, WagonR would also now go into that rupee formula. You already have, I think now a sizeable number of models, which have moved to the new formula which is adding from Ignis to Dzire...
Swift.
The Swift.
Brezza.
Brezza.
WagonR, Ertiga.
Ertiga and WagonR. So now almost -- those 6 models have already moved to this formula. And by 2022, we will have all the models move into the new formula.
Any forecast on the rates? Like, how will the overall rate be like for 2022?
So that will be a combination of factors in terms of mix, in terms of various other things. So one, I think good part of it would be that a significant amount of ForEx movement that we see is -- one reason is also because of the royalty. So I think that will go away and therefore, the impact on account of fluctuation in foreign exchange would, to that extent, be much less.
Thank you very much. Due to time constraints, we'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Thanks to all our investors and analysts. Thank you.
Thank you very much.