Maruti Suzuki India Ltd
NSE:MARUTI
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Maruti Suzuki India Ltd
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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; Senior Executive Director, Marketing and Sales, Mr. R.S. Kalsi; Executive Director, Corporate Planning, Mr. A.K. Tomer; Executive Vice President, Finance, Mr. Pradeep Garg; Executive 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, and welcome once again to Maruti Suzuki's conference call. As you all know, the financial year 2018-'19 was a challenging year for the domestic passenger vehicle industry. And the growth was as usual, 2.7%. It's the lowest growth in the last 5 years. The weak demand environment that prevailed during Q3 financial year '19 continue to impact the industry in quarter 4 also. The company made concerted efforts to better respond to the prevailing demand environment and alight cost pressures. The production was streamlined to keep network stock under check. For the demand coming down, the onus on enhancing sales lies in generating inquiries through well-collaborated marketing efforts. With the extensive know-how of varied geographies, along with the support from all stakeholders, relevant event across urban and non-urban markets were conducted to increase sales. For the whole year 2018-'19, the company sold 1,753,700 units in domestic market, posting a growth of 6.1%. The company's strengthened its leadership position across all the 3 industry segments: passenger cars, utility vehicles and vans. Success of models launched and passed, along with the quality of response from the all new-model launches, particularly WagonR, helped enhance sales performance. For the second year in a row, all 5 best-selling passenger vehicle models in India was from this company.The company's LCV offering, Super Carry, registered sales of 23,874 units, a growth of 138% compared with last year. One of the fastest network expansion to 310 outlets spread across 230 cities is a testimony of the good market acceptance of the product. Challenges like currency devaluation and import restriction in some of our key markets affected export sales. That's 108,749 units. The company exports declined by 13.1% during the year. Turning to financial performance. The company registered net sales of INR 830,265 million, a growth of 6.3% over the same period previous year. Net profit for the year stood at INR 75,006 million, lower by 2.9% compared to the same period previous year on account of lower volume growth, adverse commodity prices, adverse foreign exchange movement and higher sales promotion expenses partially offset by cost reduction efforts, higher nonoperating income on the invested surplus compared to the last year.In 2019-'20, the auto industry will witness several regulations. Introduction of Anti-lock Braking System and implementation of second phase of safety regulations are amongst major ones. So BS VI regulation is coming into effect from 1st April 2020. It will be applicable on registration of vehicles and not on production. This means BS-IV spec vehicles cannot be sold from 1st April 2020. And any unsold inventory beyond 1st April will be of no use. A careful volume planning needs to be done in such a situation. Also, all 3 major regulations will come into effect simultaneously in the financial year 2019-'20. These regulations would lead to increase in price and may affect the demand specifically of price-sensitive, entry-level cars. It is also interesting to see how the customers will respond to the change in regulations. There may be a chance that customers may keep on the purchase of the vehicle in anticipation of a price increase. On the other side, customers might prefer technologically-advanced vehicles, which will not alter the pace of buying. Overall, the year '19 '20 appears to be an unpredictable year. While SIAM had shared our guidance of 3% to 5% for the current year, the company remains focused on growing faster than the industry. We can now take your questions, feedback and any observations that you may have. Thank you.
[Operator Instructions] The first question is from the line of Pramod Kumar from Goldman Sachs.
So my question pertains to the Gujarat sourcing. I believe this quarter, you have had a stable effect because of the second plant being inaugurated there and not much of volume demand. So if you can just throw some color on what are the sourcing this quarter from Gujarat and how do you see this shaping up for the course of FY '19 given the -- and the models which are being currently produced and what new models will be added in the Gujarat facility, sir.
The sourcing from Gujarat was 96,272 cars this quarter. The point that we made specific pretty most on the second plant, they just got inaugurated in January. And I think the point that we were making was that the volume ramp-up will happen over the period. Until such time that the volume ramp-up happens, there will be a lower fixed cost and depreciation that you will have to carry, which will then get equated over the next 6 months to 1 year when you slowly go up towards full capacity.
And any on the models which have been manufactured there? And what new models we'll get out of that? Will the new -- coming new brand name introduction will be through Gujarat?
No, so it will be a flexibility that we will continue to work on between Gujarat and Haryana. It will depend on what makes more economical sense in there to produce. So at the moment, we are making the Swift and Baleno there. And in the future, depending on what makes more sense to manufacture, we will accordingly decide.
And has Omni been discontinued, sir?
Not yet.
Not yet. The deadline is October, right? October 2019, if I'm not wrong.
So various models have various regulated road maps. And we look at individual models, how to bring them to the road map or how to refresh them or how to discontinue. That program keeps going on.
[Operator Instructions] The next question is from the line of Kapil Singh from Nomura Securities.
My question is on margins, if you see particularly gross margins, they continue to remain under pressure. For last many quarters, it's been running in a certain band of, let's say, 13% to 15%, 16%. Whereas in last 2 quarters, we've seen a very sharp dip. So has there something that have seen for margins to remain in this band? What are you doing to improve them going ahead given the cost increases that will take place? Some color on that will be very helpful.
Kapil, yes, I think one -- a couple of things. One is that this year has been a very volatile year. So looking at margins in each quarter will be a little bit of aberration because you have to look at the whole year. First half, we had high wholesales. Second half, we had more focus on retail so wholesales were lower. So that had an impact on operating leverage in the second half. So that's one. Because if you were able to sell, let's say, 3%, 4% more, you would have seen much better margins. That's one. Second is that there have been some one-offs that have happened. Inventories, for example, in quarter 4 went down significantly. But if you compare quarter 4 last year with this quarter, just the incidents of fixed cost that gets reduced from the material cost because of the high inventory versus the opposite this year, the impact is about 1%. So that's sort of like one-off, so that will go away. Second, as I mentioned to you, that Gujarat plant is ramping up, second plant. And we have always said in the past that whenever you have a new plant coming up, there will be incidents of high fixed cost, which will get progressively reduced over the future period within 6 months to 1 year. So that's another element to note, about 70 basis points that you see now, you will see that evening out over the next year. And of course, depreciation accordingly because depreciation is brought about 1%. That's also part of the new plant, which has come up, which also will monetize over the volume increase that happens next year. There are certainly factors like foreign exchange, commodities, which have been reasonably high this year. But we have seen peak on some of them. Commodities have started cooling off. Foreign exchange, we are now better off than where we were in Q4. Because as you know, we have a quarter lag in foreign exchange. So when we move forward, I think we will see some of the spike in both these factors, commodities and foreign exchange. So there are some positives that we see moving forward. There will always be a pressure on volume because I think how the market around that pans out. First quarter will be tough because state elections. We don't see significant improvement in volumes. But thereafter, I think if things improve from there on, then the volumes will pick up and operating leverage will come back. And so these factors that I mentioned, which are one time, will also fade away.
Okay. And sir, on the cost reduction side, if you can also elaborate, any measures we are doing there, import reduction and other factors?
So there are significant targets on import reduction. We are talking about a large quantum of import reduction on the vendor side. So this target obviously will not produce result in 1 year. It takes about 2 to 3 years before we see a meaningful number. But we have looked at about 25% reduction in import content of the existing components. And this is not a static target. We are looking at even more. So that's one. Also, productivity improvement in our plants and in the vendors' end will continue to be a focus area. So this is one part of the target. Second is we are also looking at every element of cost, which is all the overheads that we incur and the discretionary spend that we are doing. And we are looking at everything very closely in terms of optimizing our spend everywhere. So we are also equally concerned on margins, and we will make our best efforts to ensure moving forward that in spite of tough market conditions, we continue to improve performance.
We'll move on to the next question that is from the line of Sonal Gupta from UBS Securities.
And just one request. I didn't get the number -- I mean like the telephone number. Can we announce them a little more in advance? Because it seems like we announce them right at the end, and it becomes very difficult sometimes. So just on the number, I mean could you share what is average discount this quarter?
Average discount this quarter were at 15,125.
125, and what's the royalty rate for this quarter?
We're at 5%. It includes both our vendors, Gujarat. So already put together, 5%.
Right. And finally, what would be the diesel ratio for the quarter and the year?
23% for the quarter. What is it for the year? For the quarter, it's 23%. I'll just come back to you for the year.
Okay, sir. And just one question. I want to understand -- I mean on the Brezza production going to TKM from 2022, is that a part of the production? Or Brezza will completely move to TKM from 2022?
So those details are being worked out, and of course, we will follow the option which is the most attractive and will give us the maximum operational advantage.
And just to answer your question, diesel for the full year is at 25%.
2-5?
Yes.
Sir, but just under TKM thing, the board has passed a resolution so we don't still have full clarity on this?
You see the board has passed a broad resolution, and the final details are being worked out. And of course, we will decide the course of action with also the maximum advantage.
We'll move on to the next question that is from the line of Amyn Pirani from Deutsche Bank.
My question was on the BS VI, and you mentioned that there could be potentially a prebuy because customers may want to take advantage of the lower prices. However in your case, it seems like you have taken the lead in launching BS VI variants. So in that case, how would it work for you? I'm assuming that once you launch the BS VI variant, like in the case of the Alto, you will only despise the BS VI variant. So then in that case, would you see a prebuy then? And I mean if you can help us on that.
I see some inventories would be there, and there is some which will get the deal fast at the same time, then maybe a customer will prefer to have more environment-friendly vehicles. So that's the way -- plus you have hopefully all 16 models. So everything cannot be done in one go. So we'll be doing all this in a field manner. So we cannot really wait until the last, this thing, the quarter in order to implement the BS VI. We'll start from 1st of April onwards, as you know. We have to do all this in a field manner and maintain a balance between inventories of the whole stocks together with the new BS VI vehicles.
We'll move on to the next question that is from the line of Yogesh Aggarwal from HSBC.
There's a couple of questions. Firstly, on -- you actually made a statement that the inventories came down in Q4. I remember in Q2 was this -- Q3 was the same thing, which is why the margins got impacted because retail was higher. And our view was that in Q4, retail could be lower, which should help margin. So that's not how it happened. It's that retail was still lower than wholesale -- sorry, higher than wholesale.
Yogesh, it has nothing to do with the network inventory. This has something to do with the finished goods and the work-in-progress inventory at our end. Now what happens is that if you were to do comparisons between quarters, and in particular quarter as inventory has gone up, both in case of financials and WIP, then a portion of fixed cost also gets amortized over that inventory. So if you compare quarter 4 of last year with quarter 4 of this year, the opposite happened, which means in last year, the inventory has gone up. This year, inventory has significantly got corrected. It came down. So between the 2, the fixed cost incident in fact is about 1%. So this happens. So if you look at year level, it will be negligible. But every quarter, you can have this kind of situations, up or down. So what I'm saying is that [ before I mention this big thing ], it is more relevant to look at the annual numbers than a specific quarter. So -- and this is temporary, so this 1% may not occur in the next quarter.
So it's more planned, which I understand. Nothing to do with the channel inventory.
No, no.
Because last quarter, we -- okay, okay. Maybe -- and then so generally, big picture if we look at Q1, queue volumes are up, and the discounts are down quite reasonably, around 7,000. And I think commodities and currency also was more flattish, so the benefit hasn't come but wasn't negative as well. So the margin expansion still needs to happen, so there must be something else, which has stood out because volumes were still up Q-on-Q.
You're looking at quarter 3 versus quarter 4, right?
Yes, yes.
So quarter 3, quarter 4, I think there has been some expansion on margins but not to the extent that you would have thought. So again, you know these reasons were similar that 1 -- 2 reasons. One I talked about conversion cost. So similarly, full year impact was 1%. Quarter 3 to quarter 4, the impact was about 0.5%, 50 basis points. The SMG cost impact, because SMG plant started in January, both [ in here ] and the other plant, so that fixed cost impact because we are working on no profit, no loss principle. So we have to absorb the cost that's incurred there. So that impact is about 70 basis point additional, which I'm saying will get minimized over the next 6 months to 1 year. So between the 2, there is an impact of about 1.2%. So if you add this in the margin of 7% that we're reporting at the operating level, then we are almost there.
Got it. Okay. Sir, just lastly, exports outlook with the partnership with Toyota, can we expect some pickup in exports going forward?
So there is some plan of tapping the African market, and we will have to see how and when we can do it. But at least, this year, there is -- I think exports will continue to be subdued even in the year '19, '20. At some point of time, we have a lot of optimism for the African market, thanks to this joint cooperation.
We'll move on to the next question that is from the line of Raghunandhan from Emkay Global.
Sir, my question was again on the margin side. Just wanted to understand like for 3 or 4 parameters, how would a benefit will come in? One was on the like new vendors were setting a plant in Gujarat. So how would that help in supporting cost reduction? Secondly, on the royalty rate, whether any reduction is expected in FY '20 versus FY '19? Then again, can you throw some light on the price increase and discounts trend expected in April onwards.
Okay. So the first point you made was on new vendors in Gujarat. So Gujarat buying and our buying is all synchronized by the supply chain. While the -- we do recognize the fact that they will have some additional cost for [ an outdoor ] investment that we will be making in Gujarat, but the fact is that a lot of it will also get offset with the volume growth that they will have. So -- and also, some of the cost reduction that we do year-on-year. So we are reasonably hopeful that we will be able to maintain cost structure the way they are today, both in case of Gujarat and in case of vendors in Haryana.
So would there be a positive impact because procurement costs will reduce in Gujarat?
The procurement cost would reduce into some extent. We'll have to compensate them for also the investment we are making. So we will be -- in that situation, we will be even out. I mean it will not be a significant reduction to begin with, but over a period, yes, over a longer period. But what is happening is that a lot of cost is being incurred on regard of logistics earlier. We will be moving a lot of materials from here to Gujarat. With that, their being locally there, that cost will come down. So that will help improving the overall cost structure. So while on one hand, the investments will have to be compensated, which will get offset with the volumes; on the other hand, the logistic costs that we were incurring on the components being supplied from here to there will get offset.
Got it, sir? And on the royalty rate, sir?
The royalty, we have always maintained that we are moving all of our models to new formula. I think today, 40% of the models have already moved to the new formula. Gradually, next 2 to 3 years, all the models will move to the new formula. So 2 things will happen. One is that all exchange fluctuation that happened will go away. Second, we have also linked royalty payments with certain volumes. So if a particular model attains a certain volume, the royalty rates will go down. So all these aspects are already positive in terms of the outflow of royalty on regard of exchange rate and regard of volume discount.
Got it, sir. And for price hikes and discount reductions, which has happened in April?
The price hikes we have taken in January, which will have a full year impact next year. So we will get some additional impact next year. We've had 90 basis point impact from this -- how much -- one in this quarter. But next year, I think this will grow into full impact for the full year. That's one. And the discount is a question of market demand and supply. Well, discount is something -- it's very difficult to ascertain at a given point in time. It will depend on how the markets behave. So first quarter is tough. If markets improve thereafter, discounts will also get corrected.
We'll move on to the next question that is from the line of Aditya Makharia from HDFC Securities.
Just wanted to know, on the diesel engines, we will discontinue the 1.3 liter on the Baleno and Swift. Is that correct?
So that's not right.
Okay. So -- but there was something -- so we've discontinued on the Super Carry or -- I just want to know what's are your view on diesel in general and especially on UVs once we transition to BS VI.
Seeing from my point of -- so there are discussion and further detailing. But broadly, because of BS VI, there's a huge economic impact, and therefore, the viability needs to be carefully studied.
Okay. But -- and just one housekeeping question. What is the export revenue in FY '19 and the similar one last year?
1,474 crores.
Okay. And for the full year?
For the full year, it's 5,335 crores.
We'll move onto the next question that is from the line of Jinesh Gandhi from Motilal Oswal Securities.
Just a couple of clarifications. First, the inventory impact you mentioned is 100 basis point on Y-o-Y basis, right?
That's right, yes.
And Q-on-Q, would be also there?
50 basis points.
Q-on-Q, 50 basis points, okay. Secondly, there are some comments by Chairman, sir, regarding diesel engines being phased out under BS VI. So that is only pertaining to Carry? Or are all diesel are we referring to?
So it's a part on the future, and it's not in the immediate -- in this financial year, and we'll have to think which model.
Okay. Okay. Not entirely, but certain models may go?
So it's being discussed, and it will be -- we'll share with you.
Fair enough. Secondly, was there any negative impact of ForEx and commodity in this quarter?
Commodity? No. Compared to quarter 3, no. But ForEx, yes.
ForEx, yes.
So ForEx comes with a lag effect, right?
Right. And what would be that impact?
ForEx impact in this quarter would be about 60 basis points.
On Q-on-Q basis?
Yes.
Okay. Okay. Understood. And lastly, what is the CapEx plan for FY '20? And how much we have invested in FY '19?
Our next year plan is about 4,500 crores. 4,500 crores this year and about the same next year.
Okay, okay. And this includes the same areas, land parcels and product development?
This includes the new models, investments. It includes R&D. It includes annual maintenance CapEx, any investment on capacity collaboration and annual maintenance projects and NAV, of course.
Okay. Understood. Understood. And one clarification, the discount number which you mentioned, INR 15,000, On Q-on-Q basis, I mean this is quite contrary to what we are hearing about discounts going up further in fourth quarter. So is this impact of any mix or -- on Q-on-Q basis, there seems just a sharp reduction in discounts.
Discounts have been lower in quarter 4 compared to quarter 3. I mean quarter 4, you'll see discount happen at INR 15,000. Quarter 3 was all-time high, and so it really [ gone up ]. But if you are to compare Y-o-Y, and then of course, discounts are higher by about INR 1,246. Again, it's INR 13,800 and INR 15,100.
Right. Right. So Q-on-Q, reduction of discount is almost 2 percentage points as a percentage of sales.
So discounts have gone down at 1.9% compared to Q3, which is a positive. And as I mentioned to you that the other negatives like conversion costs on the lower inventory; SMG cost impact of 0.7%, which are again temporary factors, which will get corrected; and the ForEx impact of about 0.6%. Well, these are offsetting the impact of discounts.
We'll move on to the next question that is from the line of Basudeb Banerjee from AMBIT Capital.
Just wanted to understand that as you summed up the benefit of 200 bps reduction in discounts getting balanced by the various line items, so just wanted to understand that on one side. Mr. Chairman has been coming on media and saying that there is structural motive of reducing discounts for your portfolio. Irrespective of that demand scenario, not the behavior of the consumers getting back to worse. So one side taking that commentary, and on the other side, visibility of decline in Q1. How should one look from a discount aspect at the base of INR 15,000 in coming couple of quarters?
The discounts are a dynamic situation. Now maybe you had a lot of talk last quarter, quarter 3, and we had accumulated a lot of inventories in anticipation of a great festival season, but that did not happen. So we had to liquidate the inventories at our dealerships. So otherwise, dealerships, where you're noticing carrying that butt of inventory end-costs. But quarter 4, we adjusted our production accordingly, and so we managed to held the inventory or optimum inventories at the dealerships. And also, we have a reasonable discount. We have, just to let you know, about INR 15,000. So I think moving forward, again, it's not annual situation, and it will also be a function of how the competitors, this thing, respond to the market situation, how the sentiment moves. So it's very difficult to forecast the discount situation for future months.
So that, I agree sir, completely the dynamic situation. But just coming from the statement which [indiscernible] have made that discounts are going beyond control and we need to take it down structurally and sustainably. So compared to the demand dynamics and compared to the [indiscernible] statement, how should one look at that [indiscernible]?
I think what we did in quarter 4, that is a representative of our average discounts, the same thing throughout the year. So it should be moving around that range, I think.
If I can just add to what Mr. Kalsi is saying that this year, I think what happened was that we had a huge build up of inventory in quarter 3, and quarter 3 discounts were irrational, absolutely irrational. And therefore, all the discounts looks much higher. But we don't want that situation to happen next year. So we'll be very carefully watching demand and supply to also ensure that our production and stocks are aligned. And therefore, if you go back by that logic itself, the discounts will be managed and controlled.
And one more question is -- against the automotive body, SIAM, guiding around 3% to 5% growth, with BS VI transition and possible Omni supply getting stopped, what is giving you the confidence of this guidance range, which you mentioned beating the industry growth? So if you can elaborate on that outlook as such, which segments, which model specifically?
We have been doing it in the past. If you see our market share, it grew from 37% to 51.2% over last the same 6 years. That is an indicator of [indiscernible] we will be deflating the industry trend. So 3% to 5% forecast, which is there. It's for the industry. And even for the year gone by, industry has grown back 2.7%. And that growth is mainly driven by Maruti. Competition is almost flat at 0.2%, while Maruti is at 6.1%. So moving forward, we beat -- we do hope to beat the industry trend, and our strength is a strong portfolio of 16 models. And as preparedness, they seem to switch over fast to BS VI norms as well. Also, some model is getting phased out. That will be the thing. There are other models which will cannibalize with that, and it will take the exact position. So all these factors put together, considering the good monsoon as well, the forecast is there. And post-elections, historical trend indicate that there is a splurge in that demand for whatever reasons. But certainly, these are some of the positives which we look at.
And the potential rise in competitive intensity, especially in the UV segment, have all those things taken into cognizance, I suppose?
Oh, yes. The competition -- while there, competition is there. It will be there. There will be new model introductions by the competition. But we have been facing it, and we will face the competition.
We have been seeing it for the past many, many years.
Yes.
And so one small question. Wage revision, which happens after 4 years, is that pending anytime soon?
No, no. That happened this year. Therefore you see a little splurge in the employee costs also. So it already happened this year.
When, sir?
It happened this year. And now we'll have it after 3 years. So 2021, '22 -- no. '22, '23, no, next wage revision. '17, '18? By '21, '22 will be the next wage revision.
The next question is from the line of Gunjan Prithyani from JPMorgan.
Would you be able to share what is the channel inventory now in the system for the Maruti?
Yes, channel inventory is fairly comfortable at the moment, and it's close to our, say, 25 to, say, 28 days of, this thing, the average sales.
And is there any differences, the difference in terms of demand trends that you've seen in the last couple of months with rural materially slowing down because that was something that you've been highlighting earlier that, that was holding up the demand? So can you share something around how the growth is panning in rural and urban now?
Well, if you see rural, urban average over the year -- say rural was 10% plus, and the urban growth was at about 2% minus. So there is growth, in fact, on the urban side. And if we see H1, H2, H2 rural growth has been about 8.5% compared to 13% in H1. So rural fully is intact, and we're expanding our network in that direction, enhancing our reach as well as penetration to capture the opportunities.
So urban has seen a material decline in the second half, right? From -- because the overall minus 2% what I'm guessing in second half, it would be a material decline?
Yes, I have to agree to some extent, but the point here is that although the base result is also much higher, with the ratio within urban. Rural is about, what, about, say at 51% to 39%. So the base effect of urban is, this thing, is higher. And moving forward, I think [indiscernible] should also look up.
And now that you're introducing all this BS VI variants, which started introducing that, would it be possible for you to share something around the cost impact that we will see? Because we do see the pricing changes, but does -- I mean given the market environment, will we be able to pass through the cost completely? Or we are passing through cost plus some margin? Just if you can share anything around the costing for these regulation changes, both BS VI and safety norms.
I think in general, whenever you have any regulation change, the costs are passed on to the customer. And I think this will be industry-wide phenomena because everyone will be incurring cost towards regulation on regard on safety, ABS and emission. So this, I think, progressively will have to be shared. So I don't see a problem with that at all. Price increase effect again depend on how the market is, how the demand is and what you can pass on at a given point in time. So that, we will have to look at, a, the cost pressures; and b, what is required to be done at appropriate time.
And so both of this put together will be close to about 30,000 to 40,000 kind of an increase? Or is -- I mean is it broadly in this range or higher than this in terms of cost?
It varies from model to model depending on what is -- our models already have safety built in. Some models will have both safety and regulation. So varies from model to model, and we have a strategy in place in terms of how to deal with it.
Ladies and gentlemen we'll be taking the last question that is from the line of Ronak Sarda from Systematix Group.
Just first, a clarification. You indicated the Gujarat plant -- second plant overhead cost of 70 bps. Does it include the depreciation as well? Or that is separate around 80, 90 bps?
This is what we're talking in the fixed cost, where we have land kind of contract. It will have a defined fixed cost. Depreciation is separate.
That is separate. So that should be on the...
Separate. So the increase in depreciation, as we mentioned, will also be partially responsible for increase now, which over a period will get settled. So it's like the situation where you will -- as well as all the question on operating leverage.
I understand, but that is separate, not include in the 70 bps?
Yes.
Perfect. And sir, the second question was on the urban demand. If you can highlight something on what's the slow -- the main reason for the slow down? Is the first-time buyers reducing in the mix? Is it more on the replacement side or the second car buying are happening? What is exactly is -- are driving this weak demand?
Demand declines right now, I can see that's a direct employee phenomena. Say -- for example, let's say, [indiscernible] 2 cars, particular rule. It is taking, say, about 1 hour, 1.5 hours to cross a special road 3 kilometers. The reason being, a lot of construction activities happening there, metal construction and also widening of the road and all that. So we were a little on the back foot on account of decongestion. But as urban infrastructure develops and say the flyover come up, roads get widened and the better -- that will discipline this [ thing free will ].Certainly, the urban demand would pick up. And again, the urban areas the macros are expanding the, this thing, in all direction. You can see [indiscernible] [ NCRSL ] what it was 10, 15 years ago and what it is today. So people would be, this thing, in the need of mobility, and there will be driving with road widening and cities expanding and decongestion happening on the poor of the cities. So certainly, we foresee that there would be a pickup in the urban demand. And [indiscernible] can be attributed to a very, very contemporary phenomenon.
Was there any total evidence to it, a bit more on the replacement side? Because what you're highlighting is maybe impacting more of a replacement demand? Or that is, I mean, something which is not clear as of now?
So it will go to replacement as well as new demand. You will see our demographics, people getting placements in, this thing, urban city. And certainly, mobility requirement would be there, and personal mobility is something which is very important as of now in the sense of very effective, mass, heavy transport system. So there is, this thing, the positivity in terms of demand expansion in urban areas as well.
Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to the management for your closing comments.
Thank you, all.