The Hindu Business Line : Cost-saving steps start paying off for Maruti

MARUTI Udyog Ltd's (MUL) performance during 2003-04 clearly reflects that the company's cost saving measures have paid off and that the incremental revenues from the over 30 per cent increase in sales volumes have actually led to a much larger 271 per cent increase in net profit due its unique ability to leverage an already much depreciated plant.

It is interesting to note that the total cost of raw materials and components consumed by MUL has only risen 25 per cent and that the per car cost of material and components has actually fallen by 3.7 per cent.

This is significant because many automobile manufacturers have been hit by an increase in input costs such as that of steel and outsourced components.

Maruti was not insulated from this development, however, it has achieved an even higher improvement from the reduction in process costs and costs from rejection of components that has enabled the company to instead post an overall decrease in costs per car.

This has been a big reason for the boost to the bottomline, since MUL's revenue per vehicle has barely increased by one per cent during 2003-04 compared to the previous year.

The fact that per car revenues has not increased during this period could also be an indicator that the company has had to pay the price of much higher competition in the B segment of the car market.

So, though sales of its B segment cars (Wagon R, Zen and Alto) had gone up by over 46 per cent during 2003-04, the `incentivisation' and sales promotion for these cars may have affected the revenues from this segment.

Otherwise, the growth in total revenues would have been higher than the growth in volumes.

The improvement in profitability margins for MUL has also been achieved on the back of lower interest costs, lesser than commensurate increase in depreciation and taxes. Depreciation during 2003-04 was higher because of the company's new accounting policy, which came into effect from 1st April 2003.

Accordingly, it has revised the estimated useful life of dies and jigs from a uniform 8 years to periods ranging from 29 months to 5 years depending on various models.

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