History repeating for Maruti as supply strain looms

MUMBAI Thu Jul 26, 2012 2:08pm IST

1 of 2. Police officials walk outside the Maruti Suzuki's plant in Manesar, located in Haryana, July 19, 2012.

Credit: Reuters/Ahmad Masood

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MUMBAI (Reuters) - Maruti Suzuki(MRTI.NS) faces months of supply woes and a slump in market share and sales as a lockout at the key Manesar car factory enters its second week, threatening a replay of a dismal 2011 when labour unrest battered volumes and profit.

The shutdown of the factory, which suppliers and analysts expect to last at least a month at a daily cost of $15 million in lost production, is likely to hobble operations for months to come, hampering the carmaker's performance in India's key October sales rush for a second straight year.

Investors have knocked $700 million off the value of India's largest car maker and shares in parent Suzuki Motor Corp (7269.T) are down over 10 percent since a riot at the factory last Wednesday killed one manager, injured scores more and landed more than 90 people in jail.

Maruti is expected to post its fourth consecutive quarter of profit falls on Saturday, hit by a weak rupee and sluggish demand. While the latest lockout will not affect the results, which cover the three months to June, it creates another headache for the struggling company.

"If it takes around a month or so, then the volumes going into the festival season will be impacted, which could bring down the overall volumes for the company ... which was the case last year as well," said Yaresh Kothari, auto analyst at Angel Broking in Mumbai.

Sales of cars and other big-ticket items typically surge during the annual festival period in October, which is traditionally seen as an auspicious time for consumers to splurge.

"They cannot achieve full production immediately once restarting the plant," Kothari added.

The slide in quarterly profit was sparked by shutdowns at the Manesar factory last summer, when weeks of intermittent strikes led to seven straight months of declining sales in 2011. For the fiscal year to March, its sales fell 11 percent and its annual profit dropped almost 30 percent.

LOST PRODUCTION

Maruti's share of the passenger car market fell 8 percentage points to 40 percent by the time the strikes ended. That had recovered to 44 percent in the April-June period of this year, but a similar slide looms.

"We really don't know when (resumption of operations) will be," Suzuki Chairman Osamu Suzuki told reporters at a seminar in Hamamatsu, Japan, on Wednesday. Suzuki plans to send 10 employees from Japan to Manesar to help it reopen.

Manesar's closure is especially painful because it is the only plant that makes the company's hugely popular Swift hatchback, which already had a waiting list of two months and in April was India's most popular car, outselling even Maruti's cheapest model, the Alto, which is usually the market leader.

Maruti has said it will not be able to import cars or shift production elsewhere to meet the shortfall in production at the plant, which accounts for just over a third of the company's total vehicle output.

"While the recent stock correction might have captured most of the financial impact that could arise from the lockout, we expect the stock to languish till the issue is completely resolved," Antique Stock Broking wrote in a recent report.

Maruti is expected to report net profit of 4.87 billion rupees for the quarter that ended on June 30, down 11 percent from a year earlier, according to analysts polled by Thomson Reuters I/B/E/S.

Around 100 of the 150 companies in Manesar that supply parts to Maruti have seen their business affected by the shutdown, said Manmohan Gaind, general secretary of the Manesar Industries Welfare Association (MIWA), a lobby group.

"The economy of the place runs on Maruti ... A lot of people are very, very worried," said Gaind. "We are closely in touch with Maruti ... I think they will be closed for at least one month."

A spokesman for Fiat SpA's FIA.MI Indian unit, which manufactures diesel engines for Maruti's cars built at Manesar, declined to comment when asked if it had suspended supplies.

Maruti, which has not provided a timeframe for reopening the plant, says workers attacked managers after a disciplinary incident. The factory's workers' union says its representatives were attacked first. Police have launched an investigation.

(Additional reporting by Yoko Kubota and Kentaro Sugiyama in TOKYO; Editing by Tony Munroe and Edmund Klamann)

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