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Edited Transcript of MARUTI.NSE earnings conference call or presentation 24-Oct-19 10:00am GMT

Q2 2020 Maruti Suzuki India Ltd Earnings Call

New Delhi Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Maruti Suzuki India Ltd earnings conference call or presentation Thursday, October 24, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ajay Seth

Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO

* Kenichi Ayukawa

Maruti Suzuki India Limited - MD, CEO & Director

* Nikhil Vyas

Maruti Suzuki India Limited - Head of Corporate Planning

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Conference Call Participants

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* Aditya S. Makharia

HDFC Securities Limited, Research Division - Analyst

* Binay Singh

Morgan Stanley, Research Division - Executive Director

* Gunjan Prithyani

JP Morgan Chase & Co, Research Division - Analyst

* Jay Kale

Elara Securities (India) Private Limited, Research Division - Analyst

* Jinesh K. Gandhi

Motilal Oswal Securities Limited, Research Division - SVP of Equity Research

* Joseph George

IIFL Research - Assistant VP

* Pramod Amthe

CIMB Research - Head of India Research

* Raghunandhan N. L.

Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst

* Rakesh Kumar

* Ronak Sarda

Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary

* Yogesh Aggarwal

HSBC, Research Division - Head of India Research and India Tech Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day. And welcome to Maruti Suzuki India Limited Q2 FY '20 and H1 FY '20 Financial Results Conference Call. (Operator Instructions) Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Nikhil Vyas. Thank you, and over to you, sir.

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Nikhil Vyas, Maruti Suzuki India Limited - Head of Corporate Planning [2]

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Thank you. 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; Executive Director, Marketing and Sales, Mr. Shashank Shrivastava; Executive Director, Finance, Mr. D. D. Goyal; Executive Vice President, Finance, Mr. Pradeep Garg; Executive Vice President, Corporate Planning and Government Affairs, Mr. Rahul Bharti; 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 statements that have to be understood in conjunction with the uncertainty and the risk 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.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [3]

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Thank you, Nikhil. Good afternoon, ladies and gentlemen. This year, the automobile industry has seen a significant decline in sales owing to several factors. One of the main factors is increase in the cost of acquisition of the car due to various reasons coming together, like implementation of more stringent safety and emission norms, increase in vehicle insurance expenses and hike in new taxes in many states. Along with this, the lower availability of finance and increased down payment requirement have effected the affordability of customer to own cars. The domestic passenger vehicle industry declined for 5 consecutive quarters, with quarter 2 financial year '20 witnessing a volume decline of 28.7% over the same period last year. All these subsegments within the passenger vehicles witnessed the decline. The sales for passenger cars, utility vehicles and vans declined by 37.2%, 3% and 45.2% respectively over the same period last year. The company was also impacted by the demand weakness and the domestic sales declined by 31.4%. Export shipments at 25,798 units also declined by 12.4% during the quarter.

The shift in consumer demand towards petrol segment is now even more evident with petrol segment now contributing to 66.7% of passenger vehicle industry domestic sales during the -- of the domestic sales during the quarter.

For the company, the contribution of petrol increased further from 74.2% in quarter 2 financial year '19 to 77.5% in quarter 2 financial year '20. The quarter witnessed the launch of 2 new models, a premium MPV XL6 and a Mini SUV S-PRESSO. The response to both the new models is encouraging. As you would be aware, the company had also progressively initiated the transition to BS VI norms and lines. Now 8 of our top selling models are complied with BS VI norms. This will help the company and its stakeholders navigate the transition to BS VI in an orderly manner.

Turning to the financial performance in quarter 2 financial year '20, the company registered net sales of INR 161,204 million lower by 14% wholesale period last year. The operating profit was INR 6,802 million lower by 39.8%, and net profit stood at INR 13,586 million lowered by 5.4% compared to the same period in previous years, largely on account of lower sales volume, higher sales promotion expenses and high depreciation expenses, partially offset by cost reduction efforts, higher fair value gains on industrial surplus and reduction in corporate tax rates. Negative operating leverage is one of the main reasons of the decline in profitability. While the company has added capacity, the volume declined meaning we suffered pressures on profitability.

The company is conscious of the current down cycle and is making all possible efforts to contain costs. [Many] have accrued in the current quarter as well on account of cost reduction efforts. We can now take your questions, feedback, any other -- and any other observation that you may have. Thank you.

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Questions and Answers

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Operator [1]

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Sir, we can open the call for a Q&A session, right? Thank you very much. (Operator Instructions) We take the first question from the line of Jay Kale from Elara Capital.

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Jay Kale, Elara Securities (India) Private Limited, Research Division - Analyst [2]

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Sir, my first question was regarding your realization increase. If you can just -- so ASP [queue] could increase. If you can just allude to these factors, which has led to this? And I'll come for more questions.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [3]

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So I think the reason for realization increasing so early, as we mentioned that there's some -- there were safety norms introduced in 5th models, and there was also transition from BS IV to BS VI. So there was a cost that was passed on to the consumers. So to that extent, the realization has gone up.

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Jay Kale, Elara Securities (India) Private Limited, Research Division - Analyst [4]

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Okay. And regarding the diesel portfolio, I mean, you have mentioned that you would be kind of exiting diesel at least for a time being from April 2020. But recently, media reports suggest you've launched Ertiga diesel variants for fleet operators. So -- and also, you had mentioned that you would be taking feedback from the customers to assess whether to go ahead with diesel in BS VI. So in your initial feedback, you said in the last 5, 6 months, what is your feedback from the customers, whether they are willing to pay more for diesel? And any -- since you're just 6 months to the transition? How are you looking at this space now?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [5]

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Actually, you're right that we did make an announcement and that, so as far as BS IV diesel is concerned, going forward, we won't be converting to BS VI because the costs related to that conversion will be so high that especially in the smaller segment, it may not make sense to have a BS VI diesel. Now when you said that what is our initial estimate on the findings on sort of research, which we have done. Actually, at this time, the research does not make sense because we really don't know what would be the prices of the BS VI diesel models, if at all, from our competitors. So once we are clear of that, then it's possible for us to do a more detailed study. And as such, the decision of whether to go in for BS VI diesel in a larger diesel would obviously be made after this study is complete.

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Jay Kale, Elara Securities (India) Private Limited, Research Division - Analyst [6]

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Okay. And just on your S-PRESSO, if you can just speak a little about your recent launch, how has been the response waiting period? And what is the kind of customer profile that you're seeing, whether it's first time car buyers and any cannibalization with the existing products? How are you seeing that product shaping up?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [7]

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Yes. So we are very pleased with the response that S-PRESSO has had so far. We have got roughly 16,500 bookings so far, which means that a rate of around 700, 750, that range of bookings per day. So that's a pretty good response I would say at this time. Regarding the type of customer, we have done a very sort of a dipstick study. So that's -- there are -- the pattern seems to be not very different from our other A segment cars. However, since we have only delivered so far about 6,000 or so vehicles, we would be able to give you a more definitive customer profile of the S-PRESSO customer once we have had enough deliveries.

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Operator [8]

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Next question is from the line of Jinesh Gandhi from Motilal Oswal Securities.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [9]

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Sir, can you throw light on how did our retail sales pan out in 2Q in Navratras?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [10]

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Q2? You want to find out the details of Q2?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [11]

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Yes.

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [12]

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So Q2, of course, I can give you exact numbers here because Q2 is over. So that was about -- overall, Q2 down was about 22%.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [13]

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Okay. And Navratra's contribution was?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [14]

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I didn't get you with the second part.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [15]

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Navratra's also would be similar? Navratra's in the share?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [16]

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No, no, no. So that is what I'm saying that this is overall Q2, which, of course, as you know, includes July and August as well.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [17]

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Sure, sure.

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [18]

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So if you are looking at Navratras, which started only on 29 September going onto 8th of October. There -- and last year, the Navratra period were actually 10th October to 18th October. So if you compare these 2 periods, so not going by the dates, the English calendar dates, but by the Hindu auspicious and inauspicious period dates. Then there has been -- actually, this year has been -- retail has been positive compared with last year.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [19]

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So there is a growth in retails. And this would be low single digit.

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [20]

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It's a small growth, but yes, it's a growth.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [21]

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Okay. Second question to Mr. Seth. Sir, can you share numbers on discounts, export spares in Gujarat volumes?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [22]

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Discounts this quarter were at average approximately at [25,761] compared to [18,758] in the same period last year.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [23]

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Okay. And export spares and export sales revenue and Gujarat volumes?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [24]

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Exports sales were at 12,295 units. So INR 1,229 crores was export sale.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [25]

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Right. And spares?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [26]

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We don't specifically give a segment's number, but we have given you the significant portion.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [27]

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Sure. And now Gujarat volumes? Gujarat plant volumes?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [28]

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Yes. So Gujarat volumes were at 82,251 units in this quarter.

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Operator [29]

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Next question is from the line of Yogesh Aggarwal from HSBC.

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Yogesh Aggarwal, HSBC, Research Division - Head of India Research and India Tech Analyst [30]

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Sir, just a couple of questions. Sir, firstly this demand pickup, it's flat year-on-year, which means it's a reasonably strong pickup on a sequential basis. So can you add some color into what kind of profile of customers which are coming here -- coming back and why they are coming back? And also related to that, are there certain -- so between BS IV and BS VI in your inventory, which models are selling well? Is it BS VI more? Or is it both the same?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [31]

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You're right, Yogesh. This -- sequentially, it has got better, and that's reflected both in our wholesale and the retail numbers. Just for your information, you would have gathered like August -- July retails are about roughly 100,000 each. September was better were about 116,000. And October looks to be even better. So yes, sequentially, there has been a good growth. And I think that is also reflected in our inquiries -- inquiry growth, especially for petrol models and also the booking growth, which is also positive.

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Yogesh Aggarwal, HSBC, Research Division - Head of India Research and India Tech Analyst [32]

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And it's from both BS IV and VI. Is there -- and inventory is also similar for IV and VI.

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [33]

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So as Ajay Seth said in his statement -- the opening statement. We have introduced 8 models BS VI starting with Alto and Baleno in April. Then we had the Swift and Dzire in June and WagonR in July. And then we had the Ertiga XL6 and the S-PRESSO, which are also BS VI. So when we introduced the BS VI models, it is done after the stoppage of production for BS IV. And for these models, we have very little stocks left in BS IV. So generally speaking, the stocks now for these models that we have introduced BS VI is only for BS VI. BS IV stock is more or less exhausted.

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Yogesh Aggarwal, HSBC, Research Division - Head of India Research and India Tech Analyst [34]

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Okay. So sir, now it has picked up. So you expect this to sustain the pickup? Or is it more you think bunching up of pent-up demand in the last 6 months? So just any color on that?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [35]

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Yes. So as today, which was pointed out in the press conference also. We really don't have a sort of a crystal ball for finding out exactly is it the -- is it sustained sort of thing change that we are seeing. But yes, we have to wait for a couple more months to see whether the upturn persists. And the reason for that is in these times, and we have noticed this change -- apparent change in the direction of the retails towards the positive. It's been a reversal with the sentiment being positive, largely because of higher promo levels and also because of the festive season. So in the absence of these 2 whether this sort of retail purchase is what we need to make an assessment and that can be done only after observing for a couple more months rather than today.

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Yogesh Aggarwal, HSBC, Research Division - Head of India Research and India Tech Analyst [36]

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Okay. And sir, secondly, on market share. So there is a little bit of a loss of market share because there were launches from competition. One, do you expect with S-PRESSO, you will be there in that market share at recent percentage volume terms? And secondly, just internally, when you look at market share, the sales from Toyota, is it considered part of your share or you consider it as a loss of market share?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [37]

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No. On the second part of Toyota, we don't count it in our sales surely. So whether our market share is affected by that, we will still -- we have still not come to any conclusions because it is only regarding the Baleno. As far as the market share is considered for if we go segment wise that is if you take a look at the passenger car segment, our market share actually went up in the vans trend, which is the C segment, also our market share actually went up in the first half. However, in the SUV segment, which is the B segment, our market share went down. But it's a little more complicated than that, as you may have seen the press conference [this evening]. There has been a change in the share of the segment itself. So forget our market share, the share of the segment itself in overall sales has changed, like the A segment, which is the passenger car segment has actually gone down from 66% to 60%. So this has -- this will also be reflected in the market share losses. So summary, if you want to ask me, our market share has gone up in A and C segments, which is the passenger car and the van segment, but we have lost market share in the D segment, which is SUV segment. And of course, as you know, in H1 '13, new launches were made by the competition, 10 of them were in this segment.

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Operator [38]

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Next question is from the line of [Aman Pirani] from Yes Securities.

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Unidentified Analyst, [39]

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Sir, my first question was on your depreciation, I mean, if I look at 1H of this year over 1H of last year, there's approximately a 30% increase in depreciation on a Y-o-Y basis. Whereas your fixed assets have only gone up by 10%. So is there some accelerated depreciation happening on certain assets, which may not be used after BS VI? Or what is happening there, if you could help us?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [40]

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So there is some element of accelerated depreciation in H1 on some of the diesel engine plants, which we have these gap, the ones that -- some portion of that if you describe has been taken on an accelerated depreciation and about INR 160 crores is the impact on H1 on all of that. So that largely explains the reason for increase in depreciation.

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Unidentified Analyst, [41]

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Okay, okay, okay. And secondly sir, what's the royalty number for this quarter?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [42]

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Royalty is at 5.2%, and the [original] royalty, which is ours and the one that's part of material cost and SMG included is INR 845 crores.

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Unidentified Analyst, [43]

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Okay, okay. But the SMG royalty will reflect in your raw material line, right?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [44]

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That's right. Yes, that's right. I am giving you the combined number.

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Operator [45]

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Next question is from the line of Jinesh Gandhi from Motilal Oswal Securities.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [46]

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Sir, there has been another expenses, there has been a substantial decline on Q-o-Q basis despite -- I mean, if I look at the inventory or higher production respect that there isn't a drop. So any one-offs there? Or that's a more sustainable number?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [47]

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You see other expenditure also includes royalty payments. So that's a variable expense. And since the sales have come down, therefore, the royalty has also come down. And so therefore, the reduction that you see for other expense is partially because of that. And of course, there has been some impact on account of cost reduction on certain areas that we've talked about overheads that we know we've kind of controlled in the first half, second quarter as well. So it's a combination of the 2.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [48]

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Okay, okay. And on the gross margin side, if I look at, there has been a fair bit of stability despite increase in discounts. So -- and that is entirely a reflection of our cost-cutting initiatives and localization efforts? Or there is some benefit also of commodity reflecting that?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [49]

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So there is definitely a cost reduction -- taking a cost reduction in insurance that we take in the beginning of the year. Also, we got some positive on account of commodity prices going down. And as I mentioned to you, overall effort of reducing overheads across all verticals. This is a combination of the 3 factors.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [50]

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Okay. Any sense on what would be commodity savings this quarter?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [51]

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The commodity impact in this quarter would be -- could be small. It's not very significant, but the cost reduction will be a larger piece.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [52]

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Okay. And -- but any sense on what that number would be cost reduction?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [53]

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I think the commodity impact comes with a lagged effect. In this quarter, it will be very small. I mean, it's not very material. But moving forward, you will see better impact on commodity as the cost -- the quality cost in crores have gone down, and we will see quarter 3 and quarter 4 and seeing much bigger impact on commodity.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [54]

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Okay, okay, understood. And lastly, in terms of inventory, so where we are at the beginning of festive and what would be a target at the end of festive season on inventory levels?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [55]

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If you're asking for network?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [56]

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Network, yes.

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [57]

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Yes. So network stock should be around at 30, 32 days types of ...

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [58]

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This is currently?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [59]

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Currently, yes.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [60]

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Okay. And post festive, this should come down materially? Or you would be building up in that ...

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [61]

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No, I think -- I am assuming that this should be -- this would be the range here anyway because you're also sending records, right?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [62]

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Right, right, right. Okay. And with respect to our diesel models, particularly where -- which won't be transiting to BS VI, what is our strategy particularly products like Brezza, which is only diesel. So by when do we plan to launch petrol there?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [63]

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Yes. So we will be converting the Brezza to BS VI petrol as we have already announced before the end of this financial year.

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Operator [64]

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Next question is from the line of Joseph George from IIFL Securities.

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Joseph George, IIFL Research - Assistant VP [65]

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Just a couple of questions. One is, could you give us a sense of what your full year tax rate would be given the new announcements by the government?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [66]

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We have a 5% reduction on the effective tax rate for the full year. And our effective tax rate earlier was around 28%. So now it will go down to about 23% or maybe shed lower than 23%.

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Joseph George, IIFL Research - Assistant VP [67]

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Got it. And sir, the second question I had was, you talked about the good booking numbers for the S-PRESSO. But in your analysis, do you find that it's cannibalizing into some of your existing models, similar segments? Or do you think a large part of this is incremental volumes?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [68]

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Yes, it's I think too early to tell that, because we have seen an upturn in the other models in this segment as well. But that's -- I think because overall market expense has gone up. So the cannibalization, if any, and the extent of it, we will be able to judge only after this, will we see a more sort of normal period of sustained numbers going forward.

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Joseph George, IIFL Research - Assistant VP [69]

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Okay, sir. And the last question that I had was in relation to the demand scenario. So you mentioned that the first 10 days of Navratras were a slight growth on a year-on-year basis. Has that continued post Dussehra, which is another 2 weeks after Dussehra? That was the first part.

And second part is, given the kind of a turnaround that we have seen compared to the declines that we were seeing earlier, do you think this is kind of a sustainable thing? Or for instance, we were talking to some of the 2-wheeler companies last few days and the sense we got is that they are also seeing flattish or slight growth kind of a scenario in the festive season, but none of them had the confidence to say that this momentum will continue going into November, December. So is the PV scenario similar to what the 2-wheeler guys are saying? Or are you all seeing a higher confidence in the sustaining?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [70]

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Exactly the trend. By the way, Navratra is first 10 days. The Navratra period was 10 days total. And we have seen that retail continuing at a good pace even subsequent to that. So we have to see how the Dhanteras, which is tomorrow, and how the -- up till leading up to Diwali, how the sales go before we arrive at any conclusion. But I would completely agree with the 2-wheeler manufacturers' assessment as well, which is that we need to look at these numbers for a longer period of time before concluding that this is a sustained growth back in the auto industry.

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Operator [71]

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Next question is from the line of Aditya Makharia from HDFC.

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Aditya S. Makharia, HDFC Securities Limited, Research Division - Analyst [72]

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Yes. I just wanted to know if you have any broad market share targets in the medium term. I believe there was some statement made by your people in Japan recently?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [73]

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Yes. So as I -- as we just pointed out, our market share in H1 was 49.8%. So there seems to be rounded targets -- rounded off targets are always great. So it looks like, I mean, obviously, we'll try to increase it whatever is the market shares we have.

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Aditya S. Makharia, HDFC Securities Limited, Research Division - Analyst [74]

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Okay. And just any developments on the hybrid side? Anything we can talk about?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [75]

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What kind of developments?

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Aditya S. Makharia, HDFC Securities Limited, Research Division - Analyst [76]

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Like, in the sense, launch timelines or because there's just so much noise around EVs in general?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [77]

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No. So we are working on the technologies. But there's a small -- there's a viability gap, which can be corrected by the government. And we are waiting for the right policy for that.

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Operator [78]

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Next question is from the line of Raghunandhan from Emkay Global.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [79]

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A couple of questions. Firstly, any update on company's efforts on strengthening the marketing infrastructure on providing line parcels or showrooms to dealers on lease?

Secondly, are you seeing any improvement in customer sentiment in -- especially the rural salaried segments? And what would be the rural share?

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [80]

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On the first part of your questions regarding the realty part, we are going ahead as per plan. And maybe for the sites, which we have actually taken, we are now in the process of making them functional. So that was our focus regarding that.

On the second part of the question, did I hear you say the rural sales?

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [81]

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Yes, sir.

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [82]

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So rural sale is -- it has de-grown this year, but at a lesser rate than the urban growth. So urban de-growth is higher than the rural one. But rural one is also substantial. It's around 18% down. Rural share of the total sales from our piece of booking is around 39% now.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [83]

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And sir, like, can you just again mention the discounts number? I missed it earlier.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [84]

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Discounts in this quarter were at INR 25,761 per vehicle.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [85]

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Got it, sir.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [86]

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Compared to INR 18,758 last year's same quarter.

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Operator [87]

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Next question is from the line of Gunjan Prithyani from JPMorgan.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [88]

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Just a follow-up on this inventory. Of the inventory that is there with the channel, would you be able to give us some sense of how much would it be of BS IV versus BS VI?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [89]

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If you include the diesel vehicles variant, then it would be roughly 50-50 types.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [90]

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And excluding diesel vehicles, how would that be? I mean, it's largely BS VI now.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [91]

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Yes. So 70% of our sales in the petrol in the BS VI comes from these BS VI models, which we have launched.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [92]

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Okay. And the other thing which you mentioned, that 30 days is the normal inventory levels that you're comfortable with now, and we're pretty much there. So is it a fair assumption that if, let's say, the positive trends on retail continue, our wholesale should also be dragging the numbers here? I mean, there's no cleanup which is yet to be done here since you're fairly advanced as far as the transition goes.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [93]

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Yes, yes. Absolutely, you're right. I repeat, if retail happen in whatever pace, wholesale now should happen. But there is a caveat which I must add whenever I mention these number of days. For example, if you sell 100 cars, and your stock is 100, you will save then 30 days of stock. However, if next month, it falls to 50, then that same stock will become 2 month's stock.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [94]

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Sure.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [95]

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So we need to look at that. So when we say that, it is with respect to running 3 month retail. So in that sense, yes, if the retail continue then -- at this rate, then probably wholesale will obviously follow that.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [96]

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So this 30 is based on July, August, September. August trend is not included in that, right? Because August, I'm assuming is going to be materially higher? Sorry, October is going to be materially higher.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [97]

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So October is not included, but August is included.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [98]

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Okay, got it. And on the financing, in the initial comments, you mentioned that there has been some reduction on the financing side. Have you seen that change during the festive, like there's more willingness to give out financing? And in your portfolio, how would that be panning out now?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [99]

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Yes. So a little bit of reduction in interest rates, of course, have been announced at many times, roughly in the range of 10 to 20 basis points. Repo rates, of course, in the corresponding period has gone down by almost 115 points or so. So yes, there is -- there has been some -- even in terms of the upfront payment, which is the down payment -- initial down payment. Some of the banks with whom we have talked have now been 100% financing on road. So -- and there are, I think, 6, 7 big banks who are doing that. So yes, there seems to have been a little more positive scenario on the financing side.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [100]

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And what would be the penetration level? Has it remained the same?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [101]

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Yes. So it is around 80%, which is similar. However, I must again put a caveat that normally we look at -- as the finance percentage, which does not really mean much because you have to see the rejection rate, which is a much better measure. Unfortunately, we don't have a formal system from the banks to have that measure.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [102]

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Okay. And just last, what is the CNG share now in the overall volume?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [103]

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The CNG share is -- of course model-to-model, it varies. But CNG share is like, I think one thing.

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Kenichi Ayukawa, Maruti Suzuki India Limited - MD, CEO & Director [104]

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On this one.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [105]

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Just one sec. Can you give me a (inaudible).

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Unidentified Company Representative, [106]

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7...

Roughly 7%. But of course model-to-model, it's different. So CNG percentage varies from -- okay, it is roughly 7%. Yes.

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Operator [107]

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Next question is from the line of Rakesh Kumar from BNP Paribas.

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Rakesh Kumar, [108]

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My first question was just a follow-up on BS IV inventory, which you talked about, half of your inventory would be BS IV models. Can you give us a sense in number of days, what would that be going by the model space?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [109]

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So for the model sale, we have BS VI vehicles introduced. You mean to say that?

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Rakesh Kumar, [110]

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Sir, BS IV model inventory in number of days?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [111]

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Yes. For which models?

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Rakesh Kumar, [112]

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BS IV models, which you have.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [113]

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All of them put together, including diesel, et cetera?

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Rakesh Kumar, [114]

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Yes. That's correct.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [115]

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Yes. That would be roughly 15, I would say.

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Rakesh Kumar, [116]

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15 days of inventory there?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [117]

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Yes.

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Rakesh Kumar, [118]

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And looking at the gross margin, which you have reported this quarter, which has expanded by 30 basis points sequentially despite close to around 16% volume decline sequentially. You talked about that you had some cost reduction benefit during the quarter. Can you take us through that, how sustainable those cost reductions are? And also, we see that you had significantly higher production as well during the quarter. So how you would be managing those factory inventories in the coming quarters?

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Unidentified Company Representative, [119]

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So on the cost reduction, I think this is a running program and you can project across the company in terms of -- mainly it was down. And I also mentioned that there is a significant cost reduction also on the materials side, which is our annual running program, where we work on various initiatives on cost reduction. So besides the normal cost reduction program that we've done every year. This special effort to look at all overheads across the company, and we are trying to work on all of our discretionary spends and other expenses. And we have been able to bring them down in the first half. And I think we look forward also if we continue to find situation not improving, we will put stricter controls on the overheads.

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Rakesh Kumar, [120]

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And about the factory inventory, which is close to around 47,000...

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Unidentified Company Representative, [121]

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Factory inventory was at about -- roughly about 50,000.

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Rakesh Kumar, [122]

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So do you plan to liquidate that in the next quarter?

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Unidentified Company Representative, [123]

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Yes. So just, obviously, as I think my colleague mentioned that the retails are looking good in this month. A lot of this now would be already ones in the factory, or it will be the process of moving with the factory. So I think this inventory will significantly come down in the next 1 or 2 months.

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Rakesh Kumar, [124]

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Okay. And my final question was, you talked about positive growth, which you saw during the Navaratri phase. Can you just take us through -- do you see any pattern in the rural and urban market, any distinction in the growth, or you see across the geography growth during the festival season?

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Unidentified Company Representative, [125]

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Yes. So it's largely across geographies. But of course, as in any period, you will have some differences between one place to the other.

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Operator [126]

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Next question is from the line of Ronak Sarda from Systematix Shares.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [127]

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Sir, my first question is, I mean, given your readiness with BS VI and the transition which you've already seen, but the competition is still at BS IV, and they will see that transition in -- they had mostly in Q4. How do you see the competitive intensity at that point of time? Do you see a situation where the discounts don't fall below in the current mark? And would we participate in a similar scenario?

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Unidentified Company Representative, [128]

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You're referring to the BS IV fire sales, right?

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [129]

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Kind of, that's if the transition doesn't take place so smoothly.

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Unidentified Company Representative, [130]

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So as I mentioned, for us, we have a much lower stock of BS IV for the models where we have introduced the BS VI. So I am not sure what the competitors would be planning to do with their BS IV stock. Obviously, it depends on their production levels and their wholesale and the network stock, et cetera, et cetera. But I can say one thing that finally, it will depend on the -- how much value consumer sees in the BS VI models. At the moment, we see good traction with consumers regarding BS VI.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [131]

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Sure. And just a follow-up on this mix. Are we seeing any indication of some pickup happening in diesel variance? Do you see some prebuying, especially on the fleet side? Or maybe Dzire or the -- or any other model with -- on the diesel side, will you see some prebuying happening?

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Unidentified Company Representative, [132]

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Yes. So if we look at overall, the diesel sale will also reflect the MPV changes, except that the percentage of sale of diesel in the industry has been coming down, as you know. So like in H1, it has come down to almost like 22%, 23% for Maruti. And for the industry overall, it has come down from 38% to 33%.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [133]

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Okay, sure, sir. And sir, second question is on the raw material side. I mean, if I look at your presentation, you have highlighted raw material cost has slightly a headwind. This is more of a amber color versus which you would attain it would be a green color, given the commodity cost of the steel has fallen sharply over the last few months. Ajay, sir, if you can just clarify again? I mean, do you see the benefits coming in, in the second half on the steel price cut?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [134]

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As I mentioned to you that in the second half, you will see certainly some reductions on commodities, because commodities, barring palladium, all across model. So steel also will give us some benefit. Besides that, even the other commodities will give us some benefit. The only other -- the only exceptional commodity we will watch is palladium where the costs have actually gone up. But I think in -- on an overall basis, there will be a reduction in commodity prices in the second half.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [135]

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Sure, sir. And any range that you can highlight, is this because varying steel cost has fallen almost 20%?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [136]

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We are under negotiation with all 16 suppliers at the moment. But I think the reduction should be reasonably good. We can't quantify the numbers at this point in time, but we are hoping that their reduction would be in line with what the market is.

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Operator [137]

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Next question is from the line of Pramod Amthe from CGS.

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Pramod Amthe, CIMB Research - Head of India Research [138]

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A couple of questions. One, are you surprised by the demand recovery in the festival?

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Unidentified Company Representative, [139]

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Short answer is no, but we are definitely relieved.

The reason was -- the reason is that we've been seeing inquiry uptick for some time, but conversion was a little less. But fortunately, we are actually -- we have seen this conversion happening in this year.

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Pramod Amthe, CIMB Research - Head of India Research [140]

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Okay. And considering that your ASP discounts are at historic high levels, how do you -- do you see -- how do you see that in the context that you have been early to adopt BS VI as compared to competition? Hence, are you forced to give out discounts as you have taken the price hike earlier than peers, and you have some disadvantage? Or this is a normal course to peel off the inventory?

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Unidentified Company Representative, [141]

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Yes. So I think it's a normal market. It's basically a response to the market condition. And we don't see -- we also see that competition has also have impact, also a very aggressive discount campaign.

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Pramod Amthe, CIMB Research - Head of India Research [142]

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But you don't see that you have a disadvantage in the short-term for early BS VI adoption?

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Unidentified Company Representative, [143]

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No. As I said, it -- with consumers, I think, are finding great value in BS VI vehicles. And therefore, that offsets the increased prices, which we may have had.

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Pramod Amthe, CIMB Research - Head of India Research [144]

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And second, just to, Ajay. Sir, considering that there has been a substantial slowdown in volume. In that context, what has been the CapEx? And are you reviewing the CapEx plan for the full year?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [145]

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This year, we will end up at about INR 4,000 crores in CapEx. So we will be in line with our plans. We've not seen any course in terms of our plans with respect to medium to long term. So we're going ahead with whatever our CapEx plans are.

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Operator [146]

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Next question is from the line of Binay Singh from Morgan Stanley.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [147]

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Just continuing on the discounts, like if you see discounts in this quarter are more than EBIT per car. So from 25,000 levels, how do you see them going ahead like in October and all have the car in the top inched higher?

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Unidentified Company Representative, [148]

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As my colleague mentioned that discounts is largely driven by what the market conditions are. So if demand over a period improves, the discount will also correct over the period. Or if demand continues to be weak, then obviously there will be discounts in the market. It's that thinking of the right problem that you have -- all of us have one surplus capacity. And if you don't -- we don't utilize it, then you know you are actually sitting on a huge fixed cost overhang. So you have to choose between the devil and the deep sea.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [149]

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So if I can knock -- compared as when discounts are higher than even INR 25,000 per unit?

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Unidentified Company Representative, [150]

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Sure, they are.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [151]

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And secondly, just around one of the earlier questions on diesel. So is it fair to assume that on 1st of April 2020, Maruti people will not have any diesel with regard to any of the offerings in any engines we see?

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Unidentified Company Representative, [152]

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Yes. Yes, I think it's a fair assumption. But of course, as we have said, we will keep studying the market. Should there be a requirement for Euro 6 diesel, BS VI diesel, then we will take a relook at it and accordingly develop our product planning.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [153]

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All right. And lastly, just on the segment mix because we've seen pretty sharp change in segment mix, which you also talked about that small car share has shrunk. Now that you've seen some sort of retail sales recovery, and you also had a model launch, how do you see the segment mix going ahead? Do you think this is a short-term phenomena or key customers, your entry-level customer is straightaway jumping to mid segment and bigger products?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [154]

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Really, I think what we mentioned was the passenger car, SUV, MUV and the van segments, need not necessarily be the first-time buyer, entry-level buyer or a replacement buyer or a additional car buyer. Yes, A and B -- the A segment, which is the hatch plus sedan is in passenger car segment, we saw a fall from 66% to 61% and it's been going on for some time now.

And as far as SUV is concerned, also in the last few years, if you have seen, it has been going up from almost by 18%, 19% to 34% today. And van segment has relatively been stable between 8% to 6% last year, and it has gone down to 5.3% in H1 of this year. So I think there is a -- it's not a short-term thing. We need to study and see because it seems to be a trend rather than just a one-off thing.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [155]

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Then we hope that Maruti's future product portfolio is also more aligned to these segments, because currently you are heavily reliant on the passenger car space.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [156]

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Yes. So -- yes. But of course, A segment passenger car is still 61% of the total launch.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [157]

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And just lastly, if I could squeeze, what is the first-time buyer number now?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [158]

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First-time buyer for Maruti Suzuki, it's around 47%.

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Binay Singh, Morgan Stanley, Research Division - Executive Director [159]

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Great. So it used to be around 51%, I think, in the previous quarter. So that's come down in this quarter?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [160]

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No, not really. I think this has also been fairly stable for a while. So it may go up and down month-on-month for this thing. But it has really been around that level for so many years, actually, if even in the last few years, 10, 15 years.

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Operator [161]

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Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments.

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Nikhil Vyas, Maruti Suzuki India Limited - Head of Corporate Planning [162]

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Thanks a lot for -- to all our investors and analysts. Thank you.

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Operator [163]

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Thank you very much. Ladies and gentlemen, on behalf of Maruti Suzuki India Limited, we conclude today's conference. Thank you all for joining us. You may disconnect the lines now.