Maruti’s Manesar Mayhem: A Special Report

One of the oldest car manufacturers, Maruti Suzuki has made its way to the headlines once again but for a negative reason. The passenger car major is unable at present to move ahead at top speed due to the various roadblocks that have come its way. The recent Manesar labour unrest scenario has led the stock price to plunge drastically by 8 per cent. This is not the first time that the company has faced labour unrest resulting in stoppage of production and thereby affecting the company’s growth.

This coupled with the recent sector-specific issues like the petrol price hike, talks of diesel deregulation, higher interest rates, slowdown in growth, inventory pile-ups and pressure on the margins as input cost rises has affected the company’s performance. So what lies ahead for Maruti Suzuki? Will the passenger car leader come out of all this and make investors happy by giving stupendous returns? Or will it dash the investors’ hopes? Read on to find out.

About Maruti Suzuki

Maruti Suzuki was formerly known as Maruti Udyog and was majorly owned by the Government of India. In the 1980s it entered into a joint venture with Japanese major Suzuki that kept on raising the stake over the years so that it currently holds around 54.21 per cent of the shares in the company. The government sold its entire stake in 2007. At present, Maruti Suzuki India is India’s largest passenger car company, accounting for around 40 per cent of the domestic car market. The company offers full range of cars from the entry level Maruti 800 and Alto to the stylish hatchbacks such as Ritz, A-Star, Wagon R, Swift, etc.

Historical Performance

Maruti had tapped the market in June 2003 as the government had planned to divest around 25 per cent of its investment to raise funds of approximately Rs 993 crore. The IPO had got an overwhelming response and was oversubscribed by around nine times and during those days was termed as a turning point in the primary market by the media. The shares of Maruti were issued at Rs 125 per share and were listed with a premium of over 25 per cent. If we look till date, the stock has given returns of CAGR of around 28 per cent in the last nine years. However, in the last three years the stock has moved nowhere and in fact has yielded a negative return of around 20 per cent. If we look at the sales volume growth over the past five years, it stands at a CAGR of around 11 per cent.

Current State Of Affairs

At present it seems that Maruti is facing serious headwinds. The current inventory pile-up issue for the sector has created additional trouble for most of the auto companies. Meanwhile, the slowing down of demand coupled with talks of deregulation of diesel has been adding fuel to the fire. The company’s plant at Manesar has already stopped production, which to some extent has reduced the burden of the inventory issue for the company. The company has till now not stopped accepting bookings but the current waiting period for the delivery of the cars has increased to as much six months. Primarily, the trouble that has erupted at its Manesar plant has stemmed out of labour unrest. Is this the only factor or is there anything more than meets the eye?

Reaching A Flashpoint

It was on July 18, 2012 during the evening hours when the production at Manesar plant was shut down due to unrest among the workers. The agitation resulted into injuring up to 100 managers and senior executives, including two Japanese emigrants and around nine policemen. What was more shocking was that an HR executive was charred to death. So what is it that caused this unrest? Maruti broadly categorizes their labour into contract workers and permanent workers. It was the lot of the contract workers who had problems with the company’s management and their refusal to pay higher wages. According to media reports, the current wage of a contract employee is approximately Rs 7,000 per month which is around half of what a permanent worker gets.

The workers had demanded a five-fold hike in their basic salary, a monthly conveyance allowance of Rs 10,000, a laundry allowance of Rs 3,000 and many other perquisites. Adding to this, the union had made a demand for a seven-week paid vacation as against the existing four-week period. According to reports, the company was not in a mood to accept any of these demands and that is what led to the flare-up. The company’s version of the incident is that the unrest was caused due to the workers’ demand for allowing a colleague to resume work even though he had been suspended for beating up a supervisor. 

Company Action

As of now the lock-out has still not got over and attempts are being made to resolve the issue with the help of the Haryana police. Maruti has announced that all those involved in this incident have been permanently suspended. The company’s management has also made it clear that it will not provide any compensation to the temporary workers during the period of the lock-out, as per the prevailing labour laws. It also wants to stop using contract workers, probably by March 2013. There also were rumours that Maruti is going to shift its Manesar plant to Gujarat but actually that is not the case. The management has clarified that there is a new plant in Gujarat which will increase the capacity and that the Manesar plant will continue to operate as before.   

The Loss Factor

The total production capacity of Maruti is around 15 lakh units per year out of which around 5.5 lakh units are produced from its Manesar plant. This is around 37 per cent of the total production capacity. The rest of the units are manufactured at three other plants located in Gurgaon. Due to the plant shutdown the production loss in terms of units would be around 1,500 to 1,600 per day and in terms of value it would be approximately Rs 70 to 90 crore per day. Over the past 12 days, therefore, the accumulated loss stands at around Rs 1,080 crore, which is around 3 per cent of the company’s FY12 sales. Considering that there are no immediate signs of resumption of production at Manesar, it seems that the losses will keep mounting up.

This is not the first time that labour unrest has impacted the company’s performance. As reported through our earlier Mindshare article titled ‘What Is The Effect of Maruti’s Production Blues?’, there was 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 and created a speed-breaker in the financial performance of the company for FY12. The sales for FY12 decreased by 4 per cent to Rs 35,587 crore while the net profit plunged almost by 29 per cent to Rs 1,635 crore.

Will Maruti Bounce Back?