Maruti Suzuki India Ltd

NSE:MARUTI

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Q3 FY '23 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 Ambaprasad. Thank you, and over to you, sir.

[Pranav Ambaprasad, executive]

Thank you, Aman. Ladies and gentlemen, good evening again. I wish everyone a very happy New Year, 2023. May I introduce you to the management team from Maruti Suzuki. Today, we have with us our CFO, Mr. Ajay Seth. From Corporate, we have Executive Director, Corporate Planning & Government Affairs, Mr. Rahul Bharti; General Manager Corporate Strategy & Investor Relations, Mr. Nikhil Vyas. From Finance, we have Executive Director, Mr. Pradeep Garg; and Vice President, Mr. Dinesh Gandhi.

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 uncertainty and the risks that the company faces. I also like to inform you that the call is being recorded, and the audio recording and the transcript will be available at our website. May please note that in case of any inadvertent error during this live audio call, the transcript will be provided with a corrected information.

I would now like to invite our CFO, Mr. Seth. Over to you, sir.

[Ajay Seth, executive]

Thanks, Pranav. Good afternoon, ladies and gentlemen. I wish everyone a very happy New Year 2023. Let me start with some of the recent business highlights. To strengthen our product portfolio, the company launched 2 new SUVs, Jimny and Fronx in the Auto Expo 2023. With this the company is aiming for leadership in SUV segment. The Jimny powered by Suzuki's ALLGRIP PRO 4-wheel drive technology carries the 50 years old heritage of Suzuki's off-road prowess. The Jimny comes loaded with safety features such as 6 airbags, break, limited-slip differential, ESP with hill hold assist, hill descent control, rearview camera, ABS and EBD.

The sporty compact SUV Fronx targeted at young aspirational car buyers who will strengthen the company's product offering in Compact SUV segment. In addition to host of safety and technology features, the Fronx is also offered with all new on 1-liter, K-series Turbo Boosterjet Direct Injection engine. In the Auto Expo, the concept electric SUV, EVX was showcased to reveal the company's plan towards electric mobility in India. Concept EVX is a midsized electric SUV concept designed and developed by Suzuki Motor Corporation Japan. The concept electric SUV EVX will be powered by a 60-kilowatt battery pack offering up to 550-kilometer of driving range. The company plans to bring it to market by 2025. The company's approach with electric vehicles is holistic with scale and localization. Earlier in March, Suzuki announced investment of INR 100 billion in Gujarat towards production of BEVs and their batteries.

Coming to other product-related highlights aligned with government's clean and green initiative, the company unveiled first mass segment Flex Fuel prototype car. The Flex Fuel vehicle is designed to run on any ethanol petrol blend between 20% and 85% fuel. Our research shows that ethanol fuel-based WagonR flex fuel prototype vehicle operating on E85 fuel, which has reduced GHG emissions by 79% in comparison to our conventional gasoline powered WagonR car. The company will introduce first flex fuel vehicles for the compact segment by 2025. Besides the company has already announced its commitment to make its entire product range E20 fuel materials compliant by March '23.

Recently, the company further expanded its clean car portfolio to Nexa channel by offering CNG powertrain technology in Grand Vitara, XL6, and Baleno. With this, Maruti Suzuki now offers 14 models with factory fitted CNG technology. The company believes in exploring a full spectrum of technologies like hybrid, CNG, bio CNG, ethanol and electric to support government of India's clean objective of reducing oil import bills and Net Zero by 2070.

Coming to the other recent business highlights, the company inaugurated 3,500 new car sales outlet, having presence across 2,250 cities makes Maruti Suzuki the only car company to achieve such a wide network across India. The company has achieved cumulative production of over 25 million units. This makes Maruti Suzuki the only Indian company to have achieved a significant milestone in passenger vehicle production. The company has commenced exports of its highly successful premium SUV Grand Vitara, the company aims to export Grand Vitara to more than 60 countries across Latin America, Africa, Middle East, Asia and neighboring regions.

In calendar year 2022, Maruti Suzuki registered an export of over 2.6 lakh vehicles, its highest ever exports in a calendar year. With the addition of Grand Vitara, the company aims to further strengthen its position as India's leading passenger vehicle exporter.

Now let me move to the business environment during this quarter. The company entered this quarter with adequate network stock in anticipation of good demand in the festive period. During the quarter, as expected, the company could maximize the retail sales. As a result, the company has about 5 days of network stock at the end of quarter 3 financial year '23.

Pending customer orders stood at about 363,000 vehicles at the end of this quarter, out of which about 119,000 orders were for recently launched models. In quarter 3 financial year '23, the supply shortage of electronic components had marginally increased in comparison with quarter 2 of financial year '23. The company could not reduce about 46,000 vehicles in quarter 3 this year limited visibility on availability of electronic components is a challenge in planning our production. The electronic component shortage are still limiting our production volumes. Our supply chain engineering, production and sales teams are working towards maximizing the production volume from available semiconductors. The supply situation of electronic components continues to remain unpredictable.

Coming to the highlights for this quarter. Financial highlights in quarter, the company sold a total of [ 465,911 ] vehicles during the quarter. Sales in the domestic market were [ 403,929 ] units and exports was [ 61,982 ] units. This was against total sales of [ 430,658 ] units, comprising [ 365,603 ] units in domestic and [ 64,995 ] units in export markets in the same period previous year. During the quarter, the company registered net sales of INR [ 278,492 ] million, during the same period previous year, the net sales were at [ 221,876 ] million. The company recorded an operating profit in this quarter of INR 21,230 million, as against INR [ 9,190 ] million in quarter 3 of previous year. The net profit for the quarter rose to INR 23,513 million from INR 10,113 million in quarter 3 of previous year.

Coming to highlights for the 9-month period, the company sold a total of [ 14,51,237 ] units during this period. Sales in the domestic market stood at [ 12,56,623 ] units. Exports were at [ 194,614 ] units. During the same period in the previous period here, the company registered a total sale of [ 11,63,823 ] units, including [ 993,901 ] units in domestic market and [ 169,922 ] in the export market. The company registered its highest ever net sales of INR [ 816,790 ] million in the period, April to December 2022, as against INR 582,841 million in the same period in the previous year. The company made a net profit of INR [ 54,256 ] million in the 9-month period this year as against INR 19,274 million in the 9 months in the previous year.

We are now ready to take your questions, feedback and any other observation that you may have. Thank you.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Your first question is from the line of Kapil Singh from Nomura.

[Kapil Singh, analyst]

Sir, firstly, I wanted to check on the gross margins. We have seen a good improvement this quarter. So if you could just call it out in terms of mix and commodity benefit. How much have you got from both separately? And also going ahead, do you expect significant commodity benefits to come in or most of them have been realized?

[Ajay Seth, executive]

So sequentially, I think there has been improvement in virtually all areas except for the fact that the sales promotion cost was higher this quarter compared to previous quarter. But if we look at our initiatives on the cost side and including the commodity, there has been an improvement there. There has been a significant improvement in exchange rate. And also, there has been some reductions that we see in the overheads where we've cut down on some of the expenses. So overall, you see a reduction on various accounts. Mix, of course, has a positive impact because the proportion of bigger cars have gone up. So there is a favorable mix that we see in our portfolio. So it's a combination of these factors, which has resulted in improvement of profit in spite of the fact that the sales promotion are a little elevated in this quarter. So that's actually the answer to your question. The details in terms of exact percentages of increase, et cetera, we can discuss separately.

[Kapil Singh, analyst]

Okay. And sir, are we expecting more commodity benefit to come in going ahead? Or most of it has been realized?

[Ajay Seth, executive]

See, commodity benefit also comes to the quarter lag. I think now it's kind of stabilized. I don't think that moving forward, you are going to see more impact because this has mostly been factored in now. There could be some small impact that you can see in quarter 4, not significant impact. And then we will have to -- what's the trend of the commodities moving forward for the next year. So I would say that there could be a minor impact in the next quarter, not significant.

[Kapil Singh, analyst]

Okay. And sir, second question was on demand. Just if you could share the outlook that we are seeing across segments or even rural versus urban. And we've launched 2 new models. Would it be possible to share what kind of reception and order books we have on Jimny and Fronx as of now?

[Rahul Bharti, executive]

So Kapil, fortunately, the demand scenario seems to be healthy as of now. And urban/rural mix is also same. Urban -- rural continues to be strong at about 44%, 45%. And we are happy with the bookings also, the Jimny and the Fronx. And next year, industry has not come out with a number. I think that I'm looking ahead [ conclave ] will be sometime next week. But what we are thinking is that we should grow faster than industry.

[Kapil Singh, analyst]

Okay, great. Any numbers to share on Fronx and Jimny booking? Or is it too early?

[Rahul Bharti, executive]

Too early, but we've got a good response, at least from the Jimny.

[Operator]

Next question is from Pramod Kumar from UBS.

[Pramod Kumar, analyst]

Sir, my first question is what -- if you can help us understand what is the average discount for the quarter given that retails were disproportionately higher than wholesale. So what's the average discount per car, sir?

[Ajay Seth, executive]

So average discount in the quarter is at INR 18,291. This is higher than quarter 2. In quarter 2, our discounts were at INR 15,200. And I think in the previous year -- sorry, previous year discounts were INR [ 43,200]. And quarter 2 discounts were at INR 13,840. So discounts have been higher this year because the retails are much higher than the wholesale. So obviously, therefore, this combination of discounts depends on what retails are you doing.

[Pramod Kumar, analyst]

And given this, the average ASP [indiscernible] normalized discounting as we keep the discounting same quarter-on-quarter, your average ASP seems to have shot up by 8.5% quarter-on-quarter. Clearly, there was some bit of a push in SUV category share went up per year over volume. But if you can just help us understand what's driving this kind of a very, very sharp jump in ASPs? And given that there was not much of a pricing action you've taken prices higher only in January. But can you just help us understand how should one look at this price or average jump in ASPs? And how should we look at it as you increase your SUV proportion closer to the industry standards or closer to the industry average from the current [ 21% ]?

[Ajay Seth, executive]

So I think in the beginning, we talked about the kind of traction that we have on the SUV segment and the demand for the newer models and the bigger cars is significantly higher. In fact, there is not so much pull for small cars at this point in time. So the mix is gradually changing towards bigger cars. And therefore, the price difference be the 2 is significant. So if you are selling 1 Alto versus 1 Brezza or Ertiga or XL6, it's almost 2.5x, 3x higher. So I think that mix makes a significant difference in the realized sales increase that you are seeing now is basically because of that mixed range. Even in our order booking, I think the bulk of the orders that we have are for the bigger cars.

[Pramod Kumar, analyst]

So in a way, this is a positive journey, right? In terms of -- if you start selling more and more higher, bigger cars, it's good for the ASP, it's good for the percentage profitability and overall profit as well because [indiscernible]...

[Ajay Seth, executive]

It's good for the ASP, profits will keep depending on what margins you make on a particular model at a given point in time. But yes, ASP will definitely go up.

[Pramod Kumar, analyst]

Because there's no discounting pressure on the [ utility ] vehicles at this point of time...

[Ajay Seth, executive]

Yes. Yes. I mean for the time being, but as the markets mature in these segments, we will have to wait and watch, but what you're saying is for the time being.

[Pramod Kumar, analyst]

And a second question on the Boosterjet engine because that's a welcome come back by you. And I understand picking up interviews with Raman Sir and then Shashank Sir from Auto Expo, that this one is a localized engine. So if you can help us -- confirm that, I think it's more or less confirm, but -- if you can help me understand, does it mean that the cost structure of this is going to be much better than what you had earlier one on in the Baleno, which was an imported engine? And also, how should one look at scalability of this engine to the new -- other models because if you can have it on Brezza or Jimny can have much lower GST rate, for example, to begin that because you're paying higher GST than some of your peers in that category. How should one look at the scalability of this Boosterjet engines?

[Rahul Bharti, executive]

So Pramod Boosterjet engine is one of the new additions that we have. And obviously, our effort always is to localize to the maximum using volumes. So as and when we get customer response, the volumes will scale up and we'll -- the localization will also improve with time. And I don't think there is any GST difference because it's in the same segment rate, both come into small cars.

[Pramod Kumar, analyst]

No, no. I'm talking about if you were just radically put this even in the Brezza, which is 1.5 liter petrol the 1.2 -- sorry, double booster 1 liter, your GST rate would definitely come down, right?

[Rahul Bharti, executive]

So this is one of the -- one of the options that one could explore, you're right.

[Pramod Kumar, analyst]

I think that's a pretty big one, right, given that -- have already been sold well despite the price premium. And if we can further improve the comprehension of the pricing, that's a welcome for both the company and the customers, right?

[Rahul Bharti, executive]

Thanks for the suggestion.

[Pramod Kumar, analyst]

And sir, CNG finally, how are you seeing the uptick on CNG with elevated, because last quarter, if I'm not wrong, you did have a higher intake of higher dispatches of CNG, which also probably helped your mix to an extent. Is it right?

[Rahul Bharti, executive]

So far, CNG penetration is fine, but we are concerned that the prices are abnormally high and industry has represented to the [indiscernible] committee. I do not know how much time the government takes on deciding the CNG like -- accepting the recommendations of the committee, but if the recommendations are accepted, then it would provide some breather to the CNG sales. At least in commercial vehicles, sales have been impacted significantly.

[Operator]

Next question is from Raghunandhan N. L. from Emkay Global.

[Raghunandhan N. L., analyst]

Congratulations on a good set of numbers. Firstly, sir, considering the large order book and low stock with the dealers, how are you seeing on the ramp-up of production, Q3 was impacted by lower working days and also the maintenance shutdown and also the supply issues, which you alluded to, but can Q4 be better than Q3? What I'm trying to get is that is there a gradual improvement in terms of supplies and with more working days, would you be seeing a better Q4 compared to Q3?

[Rahul Bharti, executive]

Thanks. You're absolutely right. The number of working days in Q3 were less because of the maintenance shutdown and because of some level of semiconductor constraints. Production capability, fortunately, we have some headroom. So the bottleneck as of now is semiconductors. The situation has improved, but I wish I could give you a better answer. Still, there is uncertainty, and we also get to know just a month ago, how much would be the availability for the next month. So we are also hoping and making efforts that semiconductor availability improves, and we are able to service demand in the market.

[Raghunandhan N. L., analyst]

Got it, sir. On the hatchback side, do the share has been reducing, there has been positive growth in the hatchback volumes and going forward towards the next year, how do you see the segment trending? Do you expect growth to continue? What would be the triggers which would help the hatchback demand? Because what I understand is the customers have been postponing purchase of entry-level vehicles and they could come back if a situation improves. How are you looking at that particular market coming back?

[Rahul Bharti, executive]

So we would still like to put a lot of effort on hatches because if India has to grow, it's -- and with a 3% penetration, we want more people from the 95% -- 97% club come into the 3% club, and chances are the first car would be a hatch. So we would like to facilitate that to the maximum. Unfortunately, whatever increases -- cost increases that we have in percentage terms, the impact is higher on smaller cars because the cost increase is fairly constant in absolute terms, but on a lower price of the car, it translates into a higher percentage. So we would like hatches to continue. And fortunately, there is positive growth, as you said. But as a segment, the share has come down. As of now, we are hopeful that hatches should also grow.

[Raghunandhan N. L., analyst]

Got it, sir. Lastly, on Grand Vitara, there has been a good acceptability, volumes have been trending higher, Q3 volumes were better than Q2. And though Maruti has only marketing margin that doesn't seem to have impacted our gross margin. So just wanted to understand, would it be fair to assume that at EBIT margin level, even Grand Vitara would be broadly similar or near to the blended margin?

[Ajay Seth, executive]

We -- as a policy, you are aware, we don't comment on segment or product specific margins. But our approach is that we should maximize profits to the extent possible wherever possible.

[Operator]

Next question is from Gunjan Prithyani from Bank of America.

[Gunjan Prithyani, analyst]

Couple of questions. Firstly, just quick bookkeeping numbers. What was the royalty rate in this quarter as well as if you can share the retails done in the quarter as well?

[Rahul Bharti, executive]

Royalty was about 3.9% because the mix of slightly newer models. And retail, we retail about 4.8 lakh units in the quarter in the domestic market.

[Gunjan Prithyani, analyst]

Okay. Got it. Now just moving to the questions. I think first one I have is on these 2 new launches, which you show -- which you've showcased. If you can just give us some color on -- by when would be available in the market at dealerships? And what sort of timeline should we be looking at? And also, maybe I'm not asked here in terms of positioning of prongs, if you can help us understand where are you looking at this more in the SUV segment or micro UV? Where is it positioned in terms of the market sizing when you're putting this in the market?

[Rahul Bharti, executive]

Okay. So sorry, I missed the first part of your question?

[Gunjan Prithyani, analyst]

The time lines when we could start seeing this?

[Rahul Bharti, executive]

It should be early next financial year. We've mentioned spring. We should -- they should be out in the market. And we are collecting bookings as of now. They have got good response from customers. The Jimny, as we say, is purity. It is purity of function, which is it's true off-roader with many, many modern features, as Mr. Seth mentioned in his initial remarks. The Fronx is a compact SUV, and this -- the shape is entirely fresh and new. So we are calling it the shape of new. And it will have its own fan following, own set of customers who would like it. Typically, we've seen that customers take liking to a particular shape and we are waiting for customer response on this.

[Gunjan Prithyani, analyst]

Okay. Got it. The second question is on the regulation. Now there are 3 sort of regulations which keep cropping up, [indiscernible] and airbag, which again still a few months away. But if you can share where we stand on these regulations in terms of transition as well as how should we be thinking about incremental cost pressure because of these regulations. And the second part to that will be given we did make the diesel exit a couple of years back, how does that position us versus the competition? Some color on that?

[Rahul Bharti, executive]

Okay. So as far as the safety regulations are concerned, 6 airbags, 3-point seatbelt and seatbelt reminder. So I am is in discussion with the industry on the lead time for implementation. So that is already under discussion. We are not discussing cost much, but it generally costs about INR 20,000 higher for the entire system for -- of airbags, including the electronics, controls, the total delta between in cost between a 2-airbag car under 6-airbag car. On RDE, RDE is actually a subset of BS VI Phase II. So we have -- BS VI Phase II have RDE and diagnostics. So we are very well comfortably positioned to meet it, not much cost impact either, at least on gasoline. I do understand on diesel, there would be a sizable impact. And this is one of the reasons why we had taken the call on diesel much earlier. And with every passing day, the feeling gets reinforced that we took the right decision.

The last is CAFE. So CAFE, we are fortunately -- I do not know how many of us are aware. Maruti has the least fleet carbon dioxide emissions in the entire Indian car industry. And despite all the global players present here, and it will get better with time. So this year would be better than last year. We are comfortably positioned on CAFE and will support the governments in a carbon reduction efforts, also oil import reduction efforts.

[Gunjan Prithyani, analyst]

The government has been talking about these penalties. I mean any idea as to -- are these already under implementation from F '23 onwards and companies which don't comply will be penalized. Do you have any color on that?

[Rahul Bharti, executive]

It is still a subject under discussion. But our understanding is that it will need more detailing and more -- a framework of rules to implement. So it is -- we'll have to understand the details as yet. More details need to be known before we can conclude.

[Operator]

Next question is from Kumar Rakesh from BNP Paribas.

[Kumar Rakesh, analyst]

My first question was around the point which you talked about that Maruti is aiming for SUV market leadership in FY '24. So now the SUV market has become very different, how the passenger car market is where you have a very strong market leadership more than 60% market share and it's dominated by you, whereas SUVs are higher fragmentation and multiple players with IT market share. So how do you see that industry moving forward now with your model coming in and your aspiration of having the market share leadership in SUV and also 50% market share overall in the country? Do you see that you will be able to push the SUV segment as well as consolidated as the passenger car market is?

[Rahul Bharti, executive]

So the hatchback, the hatches and the SUVs are a different story. As far as SUVs are concerned, it is good to see that the Indian customer is moving up and is becoming more transparent and he has appetite for the latest features and technologies. And we are equally happy to provide such technologies and features in our cars. And with the latest 2 offerings that we have recently launched. So we have 4 now. The Brezza, the Grand Vitara, the Jimny, the Fronx and many of these are constrained by supply. So as and when the supply situation improves, we are quite confident that we'll reclaim the #1 position in SUV segment also. There was some delay in the launches, but we are there.

[Kumar Rakesh, analyst]

Got it. My second question was around the impact from the semiconductor shortage. So you talked about that in December quarter, there was a production impact of about 46,000 units. This was higher compared to what we had seen in September quarter of about 35,000. So what's the impact...

[Rahul Bharti, executive]

Marginally higher. No, there's a lot of dynamism and uncertainty in this. It's quite random. And we are takers on this market, can't do much about it. Always making a lot of efforts in reducing our requirement of semiconductors to the bare minimum. Sometimes for commonization across platforms, we use a higher spec, a higher common -- least common -- the highest common and above. So there, we are going variant-wise and reducing the semiconductor requirements so that the same number of semiconductors can service more cars. So all those kind of efforts, depopulation, et cetera, value and engineering we are doing from our end, of course, and trying to get maximum from the market and our suppliers.

[Kumar Rakesh, analyst]

So my reading in that case should be that the situation is not worsening. It's more of a reflection of partner is changing towards SUV and higher need for SUV and hatches?

[Rahul Bharti, executive]

Broadly, yes. But once a while it don't give you a surprise. So I would prefer not to comment.

[Kumar Rakesh, analyst]

Fair enough, I will not push you.

[Operator]

Next question is from Amyn Pirani from JPMorgan.

[Amyn Pirani, analyst]

Most of my questions have been answered. When we look forward into next year, and I think you partially answered this question. On the hatchback segment, obviously, this year, we've grown, but on a 4- to 5-year basis, it continues to be on the lower side. Where do you think the trigger could come from? Is it just because rural is also strong as per your commentary. So is it just the cost increase which has happened or the customer preferences have changed one way and this is just something that will continue? Or is there something which will be a trigger for the car category to actually start growing, especially the segment, which is 5 or 6 lakh below? Because if the share of first-time buyer does not rise, do you worry that the momentum for the overall car market or the passenger vehicle market could slow down over the next 12 months?

[Rahul Bharti, executive]

Not over the next 12 months because as of now, the outlook seems to be healthy. But yes, it is an area of concern. Possible triggers could be -- one is in the income distribution, if that segment, more employment and income creation happens in the economy, it will be very good for us. And because at least in terms of regulatory requirements, there would be some headwinds. The cost of that impacts smaller cost more. So let's wait and watch for some more time, how the economy shapes up. We do think it's still a large chunk. It's about -- well, it's about 35% of the industry.

[Amyn Pirani, analyst]

Okay. And is there, at least in your own numbers, is there a discrepancy of finance availability and ease of financing in the smaller hatchback versus the bigger vehicles? Because overall, I think the industry is at whatever, 80%, 85% financing penetration. But is there a discrepancy? And can that be a lever or that lever has been used already?

[Rahul Bharti, executive]

I don't think finance is a hurdle or an impediment. So there is a very healthy penetration in finance and buying cars. In fact, sometimes the rural penetration is more than urban in [indiscernible] so finance is not a factor.

[Operator]

Next question is from Pramod Amthe from Incred Capital.

[Pramod Amthe, analyst]

So first question is with regard to strong hybrid. What's the type of rating you have? And what type of supply chain challenges you are facing and how you plan to work on the same?

[Rahul Bharti, executive]

So it's a new product with a new technology, and we would think -- because of its carbon reduction immense benefit at some point of time, we would hope that the government also gives it a proportional support as it gets to other technologies. In terms of bookings, et cetera, we have about 23% to 25% penetration is from -- is on the strong hybrid, which is positive.

[Pramod Amthe, analyst]

Okay. And is there a supply chain change to address the waiting period or what is the effort..

[Rahul Bharti, executive]

Semiconductors.

[Pramod Amthe, analyst]

Okay. Nothing on the battery side per se?

[Rahul Bharti, executive]

No.

[Pramod Amthe, analyst]

And second one is with regard to the flex fuel product, which you displayed, congrats on that. I wanted to know, since you're talking this for 2025, what's the cost benefit economics which will play here, one. Second, what type of infrastructure challenges you expect or you want to fall in place before this rolls out in '25?

[Rahul Bharti, executive]

It is, of course -- it is -- it has a cost impact over a normal gasoline car. Some things in the engine and fuel lines, they need to be changed and some additional sensors and some additional equipment needs to be installed like heaters, ethanol, what is the percentage ethanol in the tank sensor, corrosion resistant pipes, et cetera. So there is a cost impact. In terms of -- this is for the costs of the car. In terms of running costs, the ethanol has to be at least about -- has to be at least 35% cheaper than petrol for anybody to start using ethanol because the energy content is about 30%, 35% lesser. So that is on the running economics. And what we are excited about ethanol is the carbon benefits because given the biofuel -- the biogenic nature, the carbon emissions are significantly lower. And India, because of its agricultural context can produce huge quantities. So we will support the government in this technology.

[Pramod Amthe, analyst]

And do you see any infrastructure challenges in terms of this fuel being made available? And what's the government thought on the same?

[Rahul Bharti, executive]

There are a bit for dispensing, et cetera. But they have the normal challenges which India has. The availability is one question mark, how much will be available, will sufficient quantities be available and what will be the pricing of ethanol. So efforts are on in all directions. On one side, vehicle technology on the second ethanol supply chain -- this -- including distribution, production also.

[Pramod Amthe, analyst]

And the last one, on the -- since you said the carbon benefit, is there any clarity that you will get a benefit on the CAFE norms with this product? Or that is yet to be followed up...

[Rahul Bharti, executive]

It's on the benefit. It is the right carbon accounting for ethanol as a biofuel.

[Pramod Amthe, analyst]

Right. But there is ambiguity, right, in the sense whether they will account it or not in the CAFE...

[Rahul Bharti, executive]

The [ CO2 ] is significantly lower for a flex fuel, yes.

[Operator]

Next question is from Binay from Morgan Stanley.

[Binay Singh, analyst]

Just a clarification on some of the earlier points made, both on gross margin. Firstly, on the ForEx side in quarter 2, we had almost a 50 basis point gain on ForEx because of yen weakness, will that number be similar in Q3 because that ideally should reverse right in my understanding in Q4. If you have any data on that. Secondly, is it fair that Mr. Seth said that commodities and net headwind in Q4, did I hear him correctly?

[Ajay Seth, executive]

So I made the 2 points. One on the 4. Please understand that the commodities and foreign exchange impact comes to us with a quarter lag effect. So effectively, most of the raise that you see are for the previous quarter. So therefore, you have seen there is a significant benefit that you see quarter 2 to quarter 3, we have captured the quarter 2 rate [indiscernible] the benefit. Even for quarter 4, I think there will be a blended [indiscernible] benefit that you will achieve.

We are completely hedged for the year as far as dollar/yen is concerned. So therefore, on the dollar/rupee side on the direct import, we are rupees up -- dollar surplus, although if you take in that reports, we have payables, but it's not a very significant portion as it used to be earlier, given the fact that royalty is not paid in rupees. So there will be a benefit of foreign exchange in this quarter, and it will remain stable next quarter. However, moving to the first quarter of next year, we will have to see, I mean, we have partially hedged of our exposure. We've taken hedges for next year as well. So we'll have to see what rates we finally get based on the exposures that we will incur in the first quarter. But definitely, the favorable raise that you see in quarter 2 and quarter 3, quarter 2, 3 and 4 will maybe reverse slightly in the next year.

On the commodities, I mentioned that commodities have been cooling off. We have seen reduction in steel prices, which have been negotiated for the year. So we are very clear that commodities will remain where they are. The precious metals are also stable at the moment. Barring a few commodities which have shown some inching up like copper, et cetera. So we don't see -- I said there could be status quo fourth quarter or slight increase or slight reduction depending on how they shape up. But for the next year, it's difficult to predict now because it will depend on how commodities cycles move. We do take hedges from time to time on the metals that can be hedged. And we have positions that we have taken for this year as well as for the next year on -- especially on precious metals and few other commodities.

[Binay Singh, analyst]

Great. Great. That is very helpful. Just on the ForEx side, just to remind us if yen will be around 12% to 13% of your sales? Yen denominated direct and indirect imports? Would that be fair?

[Ajay Seth, executive]

Our total exposure on yen now is about -- is about close to about JPY 100 billion, which is more direct-indirect put together, that's the kind of exposure that we have on imports of yen, and it is largely, I think, largely yen denominated exposure that we have, although we have also dollar to be exposure on payables, but I think this is a large future exposure that we have.

[Binay Singh, analyst]

Great. That's very helpful. And lastly, just on exports. Any views on -- we had almost [ 9% to 10% ] growth in exports this year. How do you see exports on growth next year?

[Rahul Bharti, executive]

So fortunately, the traction from the market is giving good signals. I think will be constrained by our supply.

[Binay Singh, analyst]

Okay. Okay. So that hopefully results in better pricing.

[Operator]

Ladies and gentlemen, that was the last question for today. With this we'll conclude today's conference call. On behalf of Maruti Suzuki India Limited, we thank you for joining us, and you may now disconnect your lines.

[Ajay Seth, executive]

Thank you.

[Operator]

Thank you.