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Maruti Suzuki India Ltd
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Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call of Maruti Suzuki India Limited. [Operator Instructions] 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. Kalsi; 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. Nikil Vyas; from Finance, we have Executive Director, Mr. D. D. Goyal, Executive Vice President, Mr. Pradeep Garg; and Mr. Sanjay Mathur. The conf call will begin with a brief statement on the performance and outlook of a 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 risk that the company faces. I also like to inform you that the call is being recorded and a 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 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 150,700 units in calendar year 2020, emerging as a top brand in the packing 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 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 '19/'20 and nearly 20% in financial year '20/'21. Recently, the company commenced the export of Jimny 3-door 4-wheel drive all-terrain vehicle to Latin America, Middle East and African markets. It's a customer-friendly initiative to further digitize the car buying journey and provide keys 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 first OEM to offer an online end-to-end real time car finance service facility. The company has been making efforts towards probably preparation of environment-friendly vehicles, which are immediately scalable solution in Indian conditions. In the first 9 months of the financial year, the sales of C&D vehicles for the company has 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 [ Daruwera ] 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. So let us come to the quarter 3. The demand momentum, which built after lockdown continued in quarter 3, as well as festive period adding to the consumer sentiments. Usually, the sales during the third quarter remains good on account of festival period and year end phenomena. Sales this year was also on similar trend in quarter 3. While the demand in the urban markets 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 3, the company's sales for the period April to December financial year '21 volumes are lower by 18% year-on-year. It's also important to keep the long-term growth trends of the Indian passenger vehicle industry in mind. The industry sales clearly are, during the decade 2000 to 2010 was 10.3%, which slowed down to 3.6% during the decade 2010 to 2020. In the 5-year period ending March '20, 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. Auto industry has a strong correlation with economic growth. And under the economies is a broad based recovery. We have to remain cautiously optimistic. During the quarter, the company ramped up production while keeping health, safety of the employees as priority and make full utilization of 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 cost is only the case of higher capacity utilization. In this quarter, in addition to precious metals, the impact of steel was also pronounced. Given the uncertainty on sustainability of demand, 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 '19/'20, had a sales volume degrowth of 16%. And therefore, growth percentages over the low base may not convey the current picture. For the period October to December 2020/'21, the company sold a total of 4 lakhs, 95,897 vehicles during the quarter, higher by 13.4% compared to the same period previous year. Sales in the domestic market stood at 4 lakhs, 67,369 units, higher by 13%. And exports were at 38,548 units, higher by 20.6%. During the quarter, the company registered a net sales of INR 232,367 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 nonoperating income. Coming to highlights for 9 months, April to December. The company sold a total of 965,626 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 436,000, 35 million lower by 20% compared to that of the same period previous year. Net profit for the period stood at INR 30,636 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.
[Operator Instructions] The first question is from the line of Kumar Rakesh from BNP Paribas.
My first question was for Ajay. So 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 where the margin was, what happened during the quarter? And what within that can reverse in the coming quarters?
Yes. So as I mentioned in the opening remarks that one of the dead front to us this time was 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 fourth 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 largely -- and there was no pricing action that was taken by us in the third quarter. So that was largely the reason for the flattish -- so there was some play of operating margin. In spite of a 3% commodity increase, our operating margin was shaped better than Q2, which was largely possible because of the operating leverage and a few cost reduction initiatives that we have taken. But largely, the reason is the commodity price increase, that's kind of -- as capital margins are at the same level as Q4 of this year.
Got it. Just a follow-up on that. So 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 in this month?
So as you know, we have followed a quarter lag on commodities. So really, the impact of quarter 2 has come in quarter 3 and the quarter 3 impact will come in quarter 4. And commodities, unfortunately, the precious metal continues to see a rise and especially metals like palladium, rhodium and platinum, which are now -- the consumption there is going up because of BS IV to BS VI shift. So that's one area of concern. And second, of course, is that of -- the steel manufacturers have significantly hiked the input cost. So that's going to be the other factor. So we are, at the moment, trying to compute in terms of what the impact would be in the fourth quarter and thereafter. But it's very difficult to say at this point in time. But there will be definitely an impact of commodity in the fourth quarter.
Got it. My second question was, what would be our strategy to manage these cost inflations, the cost efficiencies, as well as pricing increase? So how essentially, we are going to look at the balance between the margin performance and the price increases?
So I think we will have to keep a balance within the market and pricing action. We'll have to see how the demand is. And while on one hand, we are reducing, we have sales promotion over what we had in the previous year, so that's helping us. But we have also taken some pricing action where we have moved our prices in quarter 4, I think it will be effective end of January. So there will be some impact of that, that you will see in quarter. 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. So we have also looked at our supply chain very closely and looked at what are the other methods of which we can then offset the commodity cost by various other initiatives that we can pick up. So that work is all at this point in time.
The next question is from the line of Raghunandhan N. L. from Emkay Global.
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? And secondly, with -- congratulations on the Jimny launch. When can this model be expected to be launched in India? And also like -- sorry, for squeezing the third question. Do you see any indications by government on possible hybrid vehicle in centers or CAFE norms postponement?
Yes, thank you for the question. So on the first question on the replacement buying demand, we have seen a sharp fall in replacement buying demand from about 26% last year to around 19% this year. So there's been a sharp fall of about 7%, even 7.2%. It hasn't really changed in last quarter. So 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's also borne by the fact that the average age of the vehicle is coming into the true value is -- for our vehicles -- or for the preowned cost has gone up by almost 1.2 years from 8 years to 9.2 years. So I think the replacement line is still not bounced back. Although I suppose with the better -- 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 Jimmy has, 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 [ information norms ], I would request Rahul Bharti to maybe give it a shot.
Sure. Thank you. Thanks, Shashank. You asked about hybrid -- 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 some CO2 to a large extent. So 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 be -- should take into cognizance all the -- the entire context of COVID and other ratios in the auto sector, the economic impact of regulatory stringency. So we'll wait and watch on the government reaction on this.
The next question is from the line of Gunjan Prithyani from JPMorgan.
Two questions from my side. Firstly, on -- we hear a lot about the shortage of steel, semiconductor, not just in India, even from the global OEMs. If you can just talk us -- talk about, is there any challenge we can face you anticipate in the next 3, 6 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. And -- but in case there is any fear of disruption, we will inform you.
Okay. So 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 2 months, the next few weeks. So, so far, we are doing fine. And we hope that we should be able to run our line without any problem. But it's 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 festive, post year end sales? And 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 stock-outs in the market. So if you can talk about that.
Yes. So thank you for the question, Gunjan. Yes, the post-festive demand has actually been better than expected. We were -- after a very high festival demand, we were thinking that there would be a sharp fall but there has not been the fall. And in fact, at the moment, we have a pending backward of about 215,000 vehicles. So I think going forward, we would have a situation where the demand is changing 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...
Sir, can you provide 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.
Yes, that's what I call the network stock. The channel stock is -- 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 4 on the commodity. But the increases, the price hikes that we have taken in Jan, does that give us comfort that the inflation that we saw in Q3 has been largely offset? Or even there is a cost absorption flowing through from past quarter as well?
As we said, that the inflation on account of commodities is pretty steep. And we talked about number of 3%. So 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. So 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.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
Sir, first of all, can you share some numbers on discounts, export revenues and digital production?
Discounts for this quarter were at INR 20,185. And export sales, INR 1,318 crores.
Okay. And digital production?
It's -- we are at an annualized level of about 5 lakhs, and we are at peak capacity.
Okay. Okay. Secondly, with respect to -- sir, I look at the demand environment, it continues to be fairly robust and we are meeting this for almost 1.5 months or so, if not more. It suggested 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?
Yes. And I'd say that's asked the question with which finance people often ask us. But we have to walk the fine line between the demand as well as the financials. So I think we were coming off from a very bad Q1. And we still are not very sure about the COVID sentiment parts because, as you know, while the overall auto industry has seen a month-on-month improvement in the last 5, 6 months. In fact, Q3 has been pretty good, as you just saw the numbers. But remember, if you compare it with the 2 years back, then when we are still off. And in fact, probably, if we see April December figures against the year before last, we are still about 20 -- about 33% off. So I think while there is obviously a sense of relief and even I would say, a little bit of elation for the last 3, 4 months, the way month-on-month has progressed. But we need to be careful and not overdo one thing, obviously tight up the price too much and they 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. And that is the reason why we have not been able to increase the price more than what we have done so far.
Okay. Okay. And second -- in staff cost, we have seen a sharp increase on Q-o-Q basis. Is that entirely linked to production? Or are there any one-offs?
So largely correct, increases, a, on account of the fact that in the first half, we mentioned that we have not factored any increments. And we really have increments in the second half to employees. So that was one reason. And second is that there is also a one-off in the sense that we have to make some provision for retirement benefits where we -- because interest had come down. So therefore, that had to be accounted for and how much will that be?
20.
So about INR 20 crores kind of thing is onetime, where we have additional provision for the tariffs.
The next question is from the line of Mr. Kapil Singh from Nomura.
Sir, yes, just talk about 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?
Yes. So for EVs, of course, you must be aware that our industry is quite excited. At some point of time, the transition from IC vehicles to EV would happen. But at the moment, there are 3 major constraints, which are...[Technical Difficulty]
Sir, give me a moment, sir.
Should I repeat?
Yes, sir, if you can.
Yes. So regarding the question on EVs. The entire industry, as you know, has been discussing this transition from IC to EV. I suppose it is going to happen at some point of time. At this moment, the adoption of EVs is miniscule, globally, just around a couple of percentages. And actually, for the factors, which have sort of hampered this EV adoption are 3: One, the current battery technology does make 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. And 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, parking, unlike in Japan or U.S., where 85% of the cars are parked in 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. So those are the hampering and what Maruti Suzuki has been saying is that the path to electric vehicles in India will probably be through the hybrids. And also, because most analysts have been telling that the adoption in India would be around maybe 7, 8 -- 7% to 10% in the next 5, 6 years, which means that the -- a large number of IC vehicles will be produced. And we need to do something about the emission for those vehicles. And therefore, we believe that the paths to that, finally converting to EV will be through hybrid and also the use of alternate fuel types like CNG. And that is what we believe is going to be the path to electrification in India. And 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.
One question to Ajay, sir. Sir, can you talk about evaluation of costs from where we are right now? What are the pushes and pulls, discounting, marketing costs, where are we right now? And where -- are we in the -- at the lower end, middle, in terms of where do you see them over the next year?
Right. So the cost structure depends on many factors, and one of them is how fast are we expanding our capacities. So it will depend on demand outlook and our expansion -- capacity expansion plan. And earlier also mentioned that we are -- we have been in the past couple of years, we have been on the pace of putting up more capacity. Which means that as and when we start utilizing whole capacity, we'll find full benefit of the fixed cost. And in the interim, you might see a little hangover of the fixed cost because there could be some underutilization of capacity or underutilization of our capacity. You can't fully utilize it in the first year, it takes about a couple of years before you start utilizing the capacity. So that's one important ingredient of cost. And we -- 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 costs because of COVID and also because we were optimizing cost on all fronts. So we did that. But I think moving forward, we cannot afford to not do a marketing bid, because that's a cost for -- not for immediate period but for future. So I think that's something that will definitely increase. By how much, will depend on what are the initiatives that we intend to take in the area of marketing and sales. So I think that's something that we would see an increase from 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? So I think these are some of the measures 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 largely a long-term path for us. But wherever we think that we can avoid or we can have some better method of saving costs, we are working on that, and we'll definitely ensure the safe cost. So directionally, I would say, one, operating leverage where capacity utilization is much better. Second, in all other areas, we will try and optimize cost. In marketing, also, we will judiciously spend. But given the fact that in future we will have more models coming in and digital initiatives are becoming more and more in our company, so I think that cost is bound to go up from where we are today. So that's broadly the sequence of our cost structure.
The next question is from the line of Pramod Kumar from Goldman Sachs.
Sir, just to begin with 2 housekeeping questions. What is the blended price hike that you've taken in January? And also, what is the royalty rate for third and the second quarter, sir?
The royalty rate this quarter was at 4.9%. And in the second quarter...
5%.
It was 5%. So actually lower than the second quarter. On the other question that you asked about...
Price realization.
Vendor?
Blended price hike.
Blended price hike?
Yes.
Blended price hike will -- we don't have an immediate answer on that, but it will depend on various models and various variants, et cetera. Based on that, I think the price increase that we've indicated in the market is at an actual level is between -- Shashank?
Up to INR 34,000.
It's up to INR 34,000 and including the taxes. So you have to remove the taxes, you see the basic impact. But INR 34,000 is the upper end. But I think it starts with INR 4,000 or INR 5,000 to...
INR 30,000 or so.
INR 6,000 to about INR 34,000.
Model to model [indiscernible]
So model available will differ. But to give you an exact percentage in terms of what will be the impact, we will come back to you. We don't have that data indicator with us.
No issues, sir. And a question -- a follow-up question to both the royalty and the price increases. That first one is to Shashank sir, given that financing penetration would be on the rise, given the increase in cost price post BS IV to BS VI and all of that and because COVID, so how is the customer reaction to the recent price hikes? Have you seen some bit of a holdup on conversion or anything like that? Or the reason why I'm asking is that 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 -- a fall to take more price hikes in this cycle as compared to historical cycles, when rates were high and the finance independence was actually not that much. So how is the company looking at the data and thinking about this, sir?
So 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 how -- whether the conversion itself has come down. As you know, we have a 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. So as you rightly pointed out, probably the effect would be seen in the -- 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. So it's been a very few days that we have seen. And in any case, we have a lot of pending bookings where consumers are waiting to get delivery for their vehicles.
And Shashank, sir, the reason I'm asking this is, if you look at a category like 2-wheeler and most, if not all, most of your customers who buy a car are invariably already having 1 or 2 or multiple 2-wheelers in the household. And 2-wheeler prices have gone through the roof in the last 1 year or so. The increase, well, enhance in double-digit kind of a number, right? And car prices haven't actually increased that much in the last 1 year, at least because of BS IV to BS VI. So in such high inflationary environment, that cost categories be durable, every category is seeing massive price hikes. So can that be the opportunity for the car industry to kind of at least pass-through the cost burden to the consumer. And given the fact that 80% customers opt for financing, the incremental cost burden for them in terms of EMI may not be that a kind of a deal breaker aset. So because a lot of pricing in the industry will depend on how you behave as a market leader. So 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 motorcycles, for example, right? So 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 export. But this will not go in a hurry, the kind of prices, what you're seeing on the commodity side.
Yes. So you're right. And from the financial point of view, clearly, what you are saying is correct and logical. I think Goldman Sachs is quite an expert on that. But if you look at the other side of the demand perspective, then I did mention that we still have a long way to go and we compare with demand for the 2 years previous to the current one. We are still about 33% off from those high. So 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. So I think the price hike, if we were to pass on the entire cost of the increase in terms of material costs and other costs, I'm sure you would see the demand is evaporating quite a bit. And that is 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.
Fair. Sir, last one is on royalty. We have moved to this dynamic royalty regime sometime back. So I just want to understand, given the surge in volumes, what you're seeing in royalty? A lot of these milestones are linked to the model performance and the model volume. So by when do you expect the benefits of such massive hike in volumes kind of accruing in terms of lower royalty? Because that is one cost reduction, which could probably accrue to the company. And especially when prices are going up, Suzuki gets the benefit of a higher royalty payout without much kind of incremental work. So can that be a bit of a cost question for us incrementally? Can you just throw some light on by when do you expect royalty days to start easing a bit?
As we had said earlier that royalty, there are 2 entities now that all the new models will move to the rupee formula. And quite a few of them have already moved to the rupee formula. But by the year 2023, '24, virtually 95%, 96% of the models would have moved to the rupee formula. So that's one leg. Second leg, of course, is if the volumes pick up, then there is the second element of beyond certain volumes, there's a discount that fix in. So that will also kick in. So definitely, as we go along, there will be no uncertainty with respect to any exchange variation on account of quality. That will go away. And there will be a fixed amount that we know will pay. And second, of course, is a volume discount. So both will help, and it will depend on how many -- what is the volume growth and how many models will enter discount category. But one thing we are very sure that 96%, 97% models will move to the rupee category. That itself will help, and the volume discount will further help.
The next question is from the line of Binay Singh from Morgan Stanley.
Just two follow-ons from the previous question. In one of the responses, Mr. Seth stated that the key driver for margin expansion will be operating level. Could you -- should 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. So the incremental operating leverage should be very low in the business. So could you expand on -- is my understanding correct?
Yes. So I was largely referring to from a cumulative 9-month perspective. But definitely, now we are reaching that level of capacity. And based on that, I think, the kick in, in the operating leverage is visible now, as you see that the overall cost has dropped in spite of a 3% increase in the commodity prices. We have been still able to maintain margins and slightly better the margin. So that itself means that there is some kick in of the operating leverage. Otherwise, the margins would have been much lower. So that's already kicked in. What I'm 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 costs, which will eventually come down when the capacities fully utilizes. As we go along, if the demand continues to be robust and we need to expand, then typically, 1 year, you don't utilize plant fully. The second day, you start utilizing the plant fully. So there can be some play of cost at that point in time. So if you compare this full year, obviously, in this full year, the capacity utilization would be not more than 70%, 75%. So I was comparing the full year and not just the quarter. So if next year, you compare the last year, definitely, you'll find the operating leverage there.
Okay. So -- and 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. There typically, there should be higher replacement segment. So is that number that you shared for the industry? Or is it Maruti-specific number, the 26 to 19?
Yes. So that number is similar for both industry as well as Maruti. And also, you are right about the SUV. So if you 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 and also in MPV. You are right, it is in the SUV category that we have lost some amount of market share. As far as the car buying 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, plus 5% and plus 2%, respectively, and minus 7% for the replacement. And that trend is similar across the industry.
So how much is first-time buyers now? Like it used to be 40% plus, so where is it today?
48%. It is -- as per the current data, which we have, it has gone up from about 43%, 44% to between 48% and 49%.
And like, 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 the management's comments? Because if you look at last 5 years, Maruti's ASPs have largely been stagnant, and that also has been a drag on the EBIT performance of the business. So 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?
Yes. So on the product side, I will not be able to give any forward guidance. That's our policy. We have not been -- we will not be able to give you the specifics. But as regards to the SUV space, on the entry SUV, we have -- we are the market leaders with the Brezza. And also in the mid-SUV, where we have one vehicle, the S-Cross, which sort of has underperformed the Indian market, and 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.
No. But not module-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. And you are right on the SUV front, which is just about 26% last year. It's around 32%, 33% this year. We are expecting it to go up to almost 36%, 37% in the next 4, 5 years. So yes, we keep watching it. As regards to what products to bring in which segment, we obviously take -- 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. So 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.
All right. Right. And then lastly, could you comment a little bit about this memorandum of understanding that there's a change that as you've come out with on BSE? What is the thought behind that?
So that memorandum of articles, which you are referring to, it was made in 1981, I think, about 40 years back. So it did not have that element of digital -- 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, and that's the reason why we have strengthened our digital platform. In fact, after pandemic, it has become even more accelerated. And we have introduced some very class-leading programs under this digital platform, including the e-Finance space, the marketplace, the -- 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.
The next question is from the line of Pramod Amthe from Intra Capital.
A couple of questions on the digital initiative, which you have taken. Is there a fair way to assess the conversion rates in this digital? Do they vary drastically between ARENA and NEXA? And how do this -- the incremental financing option which you're giving on the digital, do you expect that to improve the conversion rates there?
Yes. So conversion ratio in digital is different. Overall, of course, the conversion ratio varies between 12% to 13%. For digital, it's lower. However, the digital inquiries as a percentage of the total inquiries portfolio that we have has increased substantially for just about 3% in 2016 to 15%, 16% last year. And this time, it's almost close to 35%. So while the conversion ratio for digital inquiries is still less, however, we do find that the number of inquiries as a percentage coming from digital platforms has almost tripled. So 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 regard the e-Finance thing, which we have referred to, we just started it. Actually, we began it with NEXA as a test case in a few cities with a few dealer cities. And we are now just a few weeks back, started on the ARENA as well. And we will be adding more banks in that key platform. And therefore, with this short period of time, it's done very well. I would say the level is -- our conversion is slightly better. However, we need to see how -- 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. And 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 the -- and hence, your capability to launch much, I would say, wider product range would be possible now versus what you might have thought 3 years back? Any thoughts on this thing?
Yes, certainly. So 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. But you are right, we can actually reduce the expenses of the launches through the digital. In fact, we have -- in the last launches we had with S-Cross, we had 6 -- 1.5 liter petrol, as you know, in August, which was done entirely in the digital platform. And there, we got extremely good response. And also the fact not only was it less expensive but also, we could manage a lot of personalization messages to be -- to the consumers. And that, I think, is a great positive of digital.
The next question is from the line of Satyam Thakur from Crédit Suisse.
So 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 show. So could you help quantify how much was the impact on margins because of that? And it could -- and this would largely be expected to reverse going ahead as that factory inventory normalizes, right?
So inventories were low. Even in the second quarter, they were not very high in the factory. But yes, it further went down, I think why you are watching it is negligible inventory in the third quarter end. So the impact, which was because of that fixed cost incidence was about 0.3%. So that 0.3%, depending on the inventory levels will get reversed or may improve. So that will depend on what the inventories are in -- at the end of the quarter 4.
Okay. And secondly, on the Jimny also incrementally -- I mean, until the time we launched something in India in the domestic market, the volumes on exports could be quite low. So how should one think about profitability on this model, this kind of volumes? Will it be much lower on profitability? Or will you price it appropriately to kind of keep profitability similar? And secondly, is the volumes like currently if one sees, what is the kind of sales Jimny does in these markets, Middle East, Africa and Latin, that seems quite small. But 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. So if any sense 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. Along -- we need to go further into time to understand how the business is, what kind of volumes we are able to get. And as of now, it is a small addition to our exports. So we'll -- and in our overall volume, the fraction would be even smaller. So how much it impacts? I think we still need to take some time and understand. But the overall -- it is not -- in terms of volume percentages, it is not very high.
And would we be limited to these 3 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. And almost every export to Europe keeps stopping every about 4 or 5 years because of some new non-tariff barriers or some new technical regulation that they bring in. So as of now, Maruti is not exporting to Europe. So we'll see as it goes along.
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.