What Is The Effect Of Maruti’s Production Blues?

In FY12, Maruti Suzuki had to tackle a series of strikes and production losses caused due to labour unrest starting June 2011. It all started with a 13-day strike in June 2011 with tiffs on the recognition of the employees’ union which was followed by a 33-day strike commencing on August 29, 2011. The last of the year came about in October 2011 with the workers going on a 14-day strike, thus halting production for about 60 days over the year. This cost the company a production block of approximately 90,000 units considering the annual capacity of the Manesar plant to be 5.5 lakhs.

In FY12, Maruti reported a drop in net sales and net profit to the extent of 3.2 per cent and 28.6 per cent respectively. This can be attributed to the rising commodity prices, currency fluctuations and productions roadblocks. The latest developments indicate an ignition of issues all over again. Production at the Manesar plant has been shut since 7 pm on Wednesday, say media reports, after a spat between workers and supervisors/managers took a violent turn with workers beating up senior officials. Portions of the plant were set on fire after this and property was extensively damaged. The figures of casualties indicate 40 managers and executives being injured and taken to the hospital, two of them being Japanese. One person’s charred body too was found and 87 people have been arrested for violence.

The Manesar plant accounts for an annual production of 5.5 lakh units of the car models ‘Swift’ and ‘Dzire’ among the key categories, apart from the production of ‘A-Star’ and ‘SX4’. The Gurgaon plant has an annual production capacity of 10 lakh units and has been unaffected by the unrest at the Manesar plant. The effect of the strife on the company’s production depends on how long the strike lasts, the ball park figure being 1,500 units per day. What would cause a drastic effect though is the plant shutting down for prolonged durations over this quarter as the automobile sector is gearing up for Q3FY13, Q3 being the quarter with the highest sales for any auto maker.

On the back of this news, Maruti’s shares are trading more than 8 per cent lower today. Moreover, Maruti is announcing their Q1FY13 results on July 28, 2012. In Q1FY13, the company sold a total of 2,95,896 vehicles, which is 5.10 per cent higher than the 2,81,526 vehicles in Q1FY12, signifying a below average Q1 growth rate. Any further negative developments on the strike front would take a further toll on the firm. At the same time, any blocks in the festive season production cycle would hamper profitability annually, similar to the trend we saw in the previous year.