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Edited Transcript of MARUTI.NSE earnings conference call or presentation 28-Jan-20 10:00am GMT

Q3 2020 Maruti Suzuki India Ltd Earnings Call

New Delhi Jan 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Maruti Suzuki India Ltd earnings conference call or presentation Tuesday, January 28, 2020 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

* Nikhil Vyas

Maruti Suzuki India Limited - Head of Corporate Planning

* Pradeep Garg;Executive Vice President, Finance

* Shashank Srivastava

Maruti Suzuki India Limited - Head of Marketing & Sales

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Conference Call Participants

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* Chirag Shah

Edelweiss Securities Ltd., Research Division - Research Analyst

* Gunjan Prithyani

JP Morgan Chase & Co, Research Division - Analyst

* Jinesh K. Gandhi

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

* Joseph George

IIFL Research - Assistant VP

* Kapil R. Singh

Nomura Securities Co. Ltd., Research Division - Executive Director

* Pramod Kumar

Goldman Sachs Group Inc., Research Division - Executive Director

* Raghunandhan N. L.

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

* Ronak Sarda

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

* Sahil Kedia

BofA Merrill Lynch, Research Division - VP

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Presentation

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Nikhil Vyas, Maruti Suzuki India Limited - Head of Corporate Planning [1]

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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 Srivastava; Executive Director of Finance, Mr. D. D. Goyal; Executive Vice President, Finance, Mr. Pradeep Garg; Executive Vice President, Corporate Planning and Government Affairs, Mr. Rahul Bharti; and 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 risks 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 [2]

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Thank you, Nikhil. Good afternoon, ladies and gentlemen. This is an exceptional year for the auto industry. Due to weak demand environment, H1 witnessed a significant drop in sales volumes, both for the passenger vehicle industry and the company as well. In Q3, the festive season helped improve the consumer sentiments. The improved sentiment supported by higher spend on sales promotion led to better sales on both wholesale and retail front for the company. The retail sales were much -- very much improved during the quarter, which led to very lean network inventory by the end of the quarter. Moreover, the company was able to reduce the stock levels of BS IV models significantly. S-PRESSO which was launched in festive season also created excitement in the market and the model featured in India's top 10 best-selling cars within a month of its launch. I'm happy to share that customers have received BS VI technology well.

In no time, the company would sell over 5 lakh BS VI vehicles in the market. As you would be aware, the company had also progressively initiated the transition to BS VI norms, well ahead of timelines. Now 11 of our top-selling models are compliant with BS VI norms. This will help the company and its stakeholders navigate the transition to BS VI in an orderly manner. With regard to diesel engine segment, during the quarter, for the first time in last 15 years, the diesel penetration for the industry fell below 30%, indicating declining popularity for diesel as a fuel. For the company, the shift towards petrol segment was even more evident, with petrol segment contributing to 80% of the sales during the quarter.

On the demand front, especially with regard to rural economy, the first estimate, indicating a strong rabi crop sowing is very encouraging. If the weather remains favorable, we would witness a healthy harvest of rabi crop in April/May, thus augmenting rural incomes and possibly improve demand.

With regards to operations, the sequential improvement in sales volume by 29% aided in better capacity utilization, leading to improved profitability during the quarter. As an environmental-friendly measure, with an aim to promote recycling and support in resource optimization and conservation, the company along with Toyota Tsusho Group announced setting up one-of-its kind vehicle dismantling and recycling joint venture in Noida, Uttar Pradesh, within 2021.

Let us see the financial highlights of the company's performance in Q3 now. The company sold a total of 4,37,361 vehicles during the quarter, higher by 2% compared to the same period previous year. Sales in the domestic market stood at over 4,13,698 units, higher by 2%. Exports were at 23,663 units. During the quarter, the company registered net sales of INR 196,491 million, higher by 3.8% compared to the same period previous year. Net profit for the quarter stood at INR 15,648 million, higher by a 5.1% compared to the same period previous year on account of cost reduction efforts, lower operating expenses, lower commodity prices and reduction in corporate tax rate, partially offset by higher sales promotion expenses, higher depreciation and lower fair value gains on invested surplus.

We can now take your questions, feedback and any other observations that you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of Pramod Kumar from Goldman Sachs.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [2]

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My first question pertains to the result orient -- result-focus numbers on discount per car? And also what was your sourcing from Gujarat this quarter, 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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Sourcing from Gujarat this quarter was at 1,16,718 units.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [4]

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1,16,000?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [5]

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718 -- 1-1-6-7-1-8 units. And our discounts were at INR 33,000 compared to INR 24,000 same period last year.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [6]

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Okay. So, sir, your Gujarat sourcing costs seems to have come down, given the amount -- number of cars you have sold this quarter. So what explains the gross margin slippage. Sir, in addition, I understand the discount bid is slightly higher, but your RM to sales seems to have come under tremendous pressure because other line items have kind of done reasonably okay. But your raw material to sales or the gross margin inversely has actually come out very weak, if you can just throw some light on what happened there in addition to the discounting.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [7]

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Are you looking at a sequential reduction? Or are you looking at the same period last year reduction? What are the...

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [8]

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Sir, if you look at it both ways, I think we were at similar raw material to sales, both in 3Q of last year and 2Q of this year, 71.4% or 71.2%. That has slipped by 130 bps or so on a sequential basis over the December quarter.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [9]

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Let me try and explain this to you. We've always said that given the fact that we have now the Gujarat branch, and there are certain elements, of course, which goes in the material costs because when you're producing more quantity in Gujarat, so there will be always some element of overheads that will get clubbed -- regrouped in the material costs, so then it will not be a like-to-like comparison. So better thing to look at is the EBIT margins rather than looking at the material costs to net sales ratio or other ratios. But to answer your question, if we were to look at Q3 this year versus Q3 last year, almost 1.6% of SMB overheads and royalty has got incrementally clubbed in this year compared to last year, so that's one reason. Of course, there are plenty of other reasons like sales promotion going up by almost 1.4%. And as we had mentioned to you even last time that when we were -- when we had passed on the impact of BS VI and safety norms, the cost was exactly passed on. There was no margin, which was added on it. Therefore, arithmetically, there will always be a negative impact of that in the ratios. Okay? And the cost reduction efforts that we took and commodity reduction that we saw between quarter 3 last year to quarter 3 now is about 1.7%. But again, I would reiterate that you should look at the EBIT numbers to give you a more meaningful sense of margins because some of these are regrouped numbers because of the Suzuki Gujarat's production where you would not only add material costs, but you also add overheads and royalties.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [10]

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Fair enough. Sir, the final question on the inventory situation for you at the end of the quarter or -- and how should one read the discounts because this is by far the highest discount what we have seen in the recorded history for Maruti? So how should one look at that number going forward, sir?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [11]

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So this is Shashank. I look after the marketing and sales function. So end of the quarter, that is end of December, stock -- the stock was around 52,000 units, which is about 9 days of inventory.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [12]

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And Shashank, would that be a driving factor for you to kind of even take up prices and rebuild on the wholesale inventory because BS VI is practically becoming -- become a nonevent for you barring the diesel phase-out? So is that a fair way -- a fair thing to say that discount should trend down materially from these levels?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [13]

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Yes. They have already trended down as you may have observed in January. And that's the trend actually across the industry. So if you look at some of our models where we have decreased discount levels by INR 5,000 to INR 7,000, and in fact, excess of INR 17,000 for some of the models.

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Pramod Kumar, Goldman Sachs Group Inc., Research Division - Executive Director [14]

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And what's your read on the current demand environment, sir, post record December retail? As in, how are the activity levels in terms of inquiry, walk-ins, conversions as per -- as the way you see it?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [15]

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So January, actually, if you look at the petrol car, inquiries are high, but the diesel inquiries are down roughly about 2% or so.

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Operator [16]

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We take the next question 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 [17]

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Sir, continuing on the demand environment, are we seeing any signs of pickup in the rural market given the positivity around rural?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [18]

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So yes, actually, that's true. In fact, if you look at the quarter-to-quarter performance, then while rural has been negative compared -- and as also urban, both of them are negative, but the rural is less negative. And in fact, if you look at Q3, the rural positive is higher than the urban positive. So there seems to be some uptick in demand and the field people, they inform us that the sentiment is much better, thanks to good swing of rabi and probably a bit bumper crop, which is expected sometime in April.

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

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Okay. But...

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [20]

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For Maruti Suzuki, our share of rural sales is now about 38%, which has gone up over the previous years.

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

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Okay, okay. And are you seeing any indications about pre-buying on the diesel front given that diesel is -- at least in the possible future, we are not getting into diesel?

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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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Yes. So as I said, this is the last month for production of diesel vehicles for us. And we don't have much stock as we, sort of, liquid our stock much ahead. Actually, as I told you, the stock out of the 52,000 units end of quarter, diesel was only 8,700 units. We sell roughly about 27,000 on an average diesel per month, so that's like already limited stock. So even if there is pre-buying, then we wouldn't have stopped, so there could -- cannot be any pre-buying.

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

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Okay, okay. Understood. And second question pertains to the financing environment. Are we seeing any improvement in financing rejection rates, which were -- which had gone up materially in first half? Is it coming down?

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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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Yes, a little bit. In fact, that's also because some of the banks have reduced interest rates, as you would have observed. Like in December, SBI reduced the rates 10 basis point. Actually, if you look at the beginning of the year, it was 8.45%, gone down to 7.90%, HDFC from 8.70% to 8.15%, same -- so also for Axis Bank, as also ICICI. So I think there has been some reduction and also the rejection rates have come down definitely. That is reflected also in the penetration levels of retail, which has also climbed up a little bit. If you look at December, it's 79.1% against 77.7% last year.

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

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Okay. How would be the rejection rates, if you can quantify that?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [26]

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Actually. It's very difficult to quantify because, as you know, this data is not available formally. Or even informally, there is no way we can select this data. This is based entirely on consumer perception, perception of the dealerships and also what the banks tell us.

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

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Right. And lastly, in terms of the price increase, which you've taken in 3Q and yesterday's announcement, what would be the average price increases?

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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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Actually, it ranges. So I don't know whether the average will give you a good this thing, but just for your information, average increase for Alto and Celerio, and these are the lower-end hatches, is roughly around between 6,000 to 7,000 units. Swift is 5,000. There is no increase in Dzire and Go. So this is -- you can say, roughly, the increase would be in the range of maybe 5,000 to 7,000, say because WagonR is about 3,500, Ertiga is about 7,000, S-PRESSO is about 4,000 to 5,000, Baleno is about 3,000. So the rough average you can calculate is around 5,000 to 6,000 units.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [29]

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Okay. Understood. And sir, lastly, export revenue number, if you can share?

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Unidentified Company Representative, [30]

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Exports is about INR 1,144 crores.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [31]

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11...

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [32]

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INR 1,144 crores. Okay, sir, great.

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Operator [33]

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We take the next question from the line of Kapil Singh from Nomura.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [34]

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Firstly, I wanted to check on diesel. Particularly, we have seen some aggressively priced 1.3 liter segment cars from your competition. So how do you think about that -- do you think that there can be some loss of volumes if competition remains aggressive? And how can it be addressed?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [35]

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We have actually calculated -- I mean, it's just a rough, you can say, a theoretical sort of assessment, but also based on what we see the previous year's movement of diesel versus petrol, so if you look at, let's say, 2012, '13, the petrol was 42% and 58% was diesel. At that time, the price difference between per liter of fuel of gasoline and diesel was about INR 31 in Delhi. So that has been coming down. As you know, now the diesel/petrol price difference in Delhi is INR 6. In fact, there are some states where diesel becomes more expensive than petrol, like in Orissa or Jharkhand or Goa and Gujarat and some of these other large states. So I think in response to that, and also there is some sense in the consumers that diesel is probably a more dirty fuel and probably doesn't have that support from the ecosystem, and that's the reason why we have seen 58% of diesel in 2012 coming down to less than 30% last month as our CFO just mentioned. So I think going forward, this trend will continue. And there are reasons for it because diesel -- the prices are going to be probably closer. Secondly, while there are a couple of models, which have been priced aggressively, and I think you referred to some of our close competitors. But overall, I think when you look at Tata or you look at Toyota, they have all increased prices substantially for diesel. So there would be a reduction and -- of the diesel percentage. And let me also -- because I think this is a quite a common question, which probably many people would have in mind. The passenger car today is that, while we say 29% is the share of diesel in December, actually passenger cars, in the passenger car segment, it is only 13%. In vans, it is 12%. In SUV, it is 68%. It is the SUV segment which seems to be largely and, that too, I think, the premium and the mid-SUV segment which seems to be largely diesel. We have a little bit of changes there. As you know, Brezza and S-Cross will no longer be produced in diesel. They are only diesel vehicle production. So we will now be producing only petrol vehicles, BS VI vehicles, starting from next month. So I think that should push up the percentage of petrol in SUV segment as well. We have news that Hector as well as Creta and Venue, they're also selling larger numbers in petrol now. So I think going forward, we will have a trend, and this trend should continue. If you do a rough calculation, as most analysts do, 70% of -- if our market share is 50.1% today, out of which about 40%, 40.2% comes from petrol and about 9.5%, 9.9% comes from diesel. But going forward, should this 70% of the petrol segment become close to, and as per our calculations and per what I just said, it could be anywhere between 80% to 85%, in which case, we should be able to maintain our market share.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [36]

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Couple of questions on the financials. Firstly, I wanted to check that depreciation has seen a sharp drop compared to what you were seeing in Q1 and Q2. And secondly, on the commodities, are -- have we -- what kind of increase should we expect? Because we heard that in this quarter, there was a sharp drop in steel prices. So some color there.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [37]

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The decrease in depreciation is due to the fact that we had taken accelerated depreciation for diesel plants in the first and the second quarter. So that's almost over. Fraction of that came in this quarter. So therefore, you see that drop in depreciation. That was the first -- answer to the first question. What was the second question?

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [38]

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Sir, sir, what is -- sir, excuse me -- so what is the sustainable depreciation rate that you would be having after this legal thing is fully amortized?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [39]

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So now I think what -- so this quarter, we had an impact of about INR 44 crores.

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Unidentified Company Representative, [40]

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INR 44 crores.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [41]

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So that INR 44 crores should also go away in the fourth quarter, and then it gets normalized. So whatever depreciation gets added on account of the new capitalization that we are doing in this period will get added on. And this will get eliminated. So you should not see much rise in depreciation, at least in the fourth quarter. What was the second question you had?

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [42]

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On the commodities, just some color because we heard that steel prices have seen a sharp drop. And then we've seen precious metals going up. So what is the outlook there?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [43]

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Kapil, we are pretty happy till the -- in the second half of this year, the commodities have dropped quite a bit. But this is a kind of a short-lived measure because commodities are actually showing a U-turn. We were given to understand that steel has started rising, and therefore, we will end up giving some increase in the first quarter of next year in steel. And the bigger pain is the precious metal, where both rhodium and palladium have shown significantly, although their quantum may not be very large, but the impact is pretty severe because they have almost doubled from the levels they were last year. So I think commodities is not a good news for the next year.

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Kapil R. Singh, Nomura Securities Co. Ltd., Research Division - Executive Director [44]

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Okay. And the price increase covers that? Or how are you thinking about that?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [45]

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I mean, it's just very...

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Pradeep Garg;Executive Vice President, Finance, [46]

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Yes, yes. I think it covers part of the input cost. Remember, we were selling BS VI vehicles from April onwards, as was mentioned by [Seth sir] also. So one thing which I must add, just as an additional information, is that the -- we have -- since we have introduced BS VI already, our new price increases are a little bit less compared to the competitors. And that should also give us a more competitive edge going forward in the petrol segment.

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Operator [47]

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We take the next question from the line of Gunjan Prithyani from JPMorgan.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [48]

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I just had a follow-up on this commodity thing, which you mentioned. So the increases that you're seeing right now, with how much lag do you see the benefit will start to reverse?

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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 we have already -- we already negotiated for commodities till the -- for this fourth quarter, we are more or less covered. So we don't see impact coming in, in the fourth quarter. But in the first quarter of next year, we will start seeing the reversal because both steel and precious metals, I mentioned, have shown an uptick.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [50]

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Okay. And on the gross margin now, is it possible for you to break up from Q2 to Q3? Because if I look at the discounting, there's clearly been a 200 basis points spike there, that has an impact on the margin. But it had offset from commodity and some of the mix impact. Is it possible for you to break that up and just give us some sense of the movement in the margins, please?

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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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One thing I mentioned earlier also was that given the fact that you have to take the SMG volumes into account, and SMG volume will also have certain provision of royalty and overheads, whatever is incremental, so that overshadows the actual ratio. But just to give you the reconciliation between Q2 and Q3, the difference between Q2 and Q3 is about 1.5%. So the material cost to net sales is actually showing an increase of 1.5% and -- of which small portion, 0.2% is on account of the overheads and royalty of SMG, it is not very large. But 1% -- 1.1% is on account of sales promotion. There is a cost reduction and commodity cost reduction as well of about 60 basis points. However, there's a very peculiar thing that happens normally in third quarter, all the finished goods -- finished cost -- fixed cost incidents. So what happens is that if your level of inventory in the factory comes down significantly, so between the 2 quarters, you will see a large impact of the fixed cost. So about 1% is that impact of fixed cost, which is not permanent. I mean, it normally comes in the third quarter and then it goes away and it becomes normal, so that's one reason. So broadly, exception is 1%. And the other reason that I mentioned to you is sales promotion, partially offset with cost reduction in commodities.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [52]

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Okay, got it. And royalty, where we -- what was the rate 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 [53]

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Royalty is at 5.4%, all put together...

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [54]

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All put together.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [55]

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Including SMG as well as MSIL.

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [56]

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And Maruti alone is at 3.8%.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [57]

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And 40% of this would be INR or it will be...

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [58]

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So we are about half of INR and half of yen.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [59]

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Okay. And just one question I had on this diesel thing. Now if -- of course, we've also said that we are open to relooking at this when we see where the customer is positioned. If the customer is still looking at diesel, then we may reassess our strategy. Now two things here. Firstly, are we flexible to reassess our strategy in lower engine segment? Or is it only for 1.5 above? And secondly, if you decide to pursue this, what is the kind of timelines that you could take to come back in the diesel segment?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [60]

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So as I mentioned earlier, for the small car -- smaller segment, actually the diesel percentage is extremely small. And it's going to get smaller. It's just 1% in the small hat; it's about 11% in the Baleno and Swift category. So it -- and going forward, I think the -- if [the RD] norms coming in a little later, I think there should not be any scope at -- currently also, as I just said, it's just between 5% to 11%. So I think we will look at the demand going forward, which we believe, if at all, some consumers for reasons of getting a higher torque or for some other reasons, of having large travel in big vehicles, as I said, only SUVs have seemed to have a large percentage of diesel, then we will look at a technical assessment and take a look at whether we can develop BS VI vehicles in the future. However, for the time line part, I am very not aware of the exact time line. And even if I was aware, I may not be able to tell you.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [61]

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Sure. And CapEx, if you can share the guidance for this year and next year, if possible? And what we've done in the 9 months?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [62]

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So we are on track. We estimate to spend about INR 4,000 crores this year on CapEx, slightly under INR 4,000 crores. And so far, we have spent about INR 2,500 crores of it.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [63]

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And any guidance for next year?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [64]

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No. We are still working on finalizing our budget, so we'll let you know once we do that.

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Operator [65]

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We take the next question from the line of Chirag Shah from Edelweiss.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [66]

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Yes. Sir, one housekeeping question first. There's a sharp jump in this other operating income...

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Operator [67]

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Excuse me, Mr. Chirag Shah, I'm so sorry to interrupt. Requesting you to please speak a bit louder, sir, as your audio is not very audible.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [68]

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Yes. Am I audible now?

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Operator [69]

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Yes.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [70]

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Sir, my first question is on other operating income. We have seen a very sharp jump bit sequentially on Y-o-Y basis. Can you just indicate what exactly it is? And how should we look at this line item, other operating income?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [71]

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This is primarily on account of uniform ex-showroom prices. So the freight recovery, we earlier used to net it off in the other expenditure against the freight expenses. Now that is not permitted as per Ind AS. So the freight recoveries, they are reflected in other operating revenues. And year-on-year, if I were to give you a comparison of these figures, in quarter 3 of this year, this freight recovery is INR 545 crores, whereas quarter 3 of last year, it was INR 248 crores, and they were shown in other operating revenues. So the expenditure is sitting in other expenditures, whereas the recovery part is coming in other operating income.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [72]

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So it is not exactly linked to the volumes, but it is also linked to the which state you are sending it across, and there could be volatility in this?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [73]

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So whenever we are introducing the new model, we are moving to this ex-showroom prices, so gradually you see this figure going up as we introduce a new model. We moved to this uniform ex-showroom price.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [74]

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Yes. And second question was on -- just to understand on this -- on the true value part of business that we have. Can you indicate what kind of volume growth we are seeing over there at the dealer level? And also some color on the type of customer in terms of what kind of age profile they are looking to buy vehicles. Are they looking to older vehicles, say, beyond 5 years? If you can share some color on the true value part of the business. I know it's not an income-generating business for us and more of a support business from dealer, but if you can have some insight over there.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [75]

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Yes. So I'll just make a fine distinction between True Value business and preowned car business. Not all preowned car business is true value. So there would be a growth of around 5% in this period, April to December, for pre-owned car business.

As far as the age and the exchange percentage, the exchange penetration percentage, it is also increased. It's now more than 26.4%. That's an increase of about 3%. As far as the average age and profile is concerned, the average age has actually remained similar around 7 to 8 years. And of course, partly, it is also -- one of the reason is that what we purchase under True Value sales, there is a strict conditioning of the number of years of cars that we can purchase.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [76]

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Okay. Okay. And is that part of business see -- can see a significant growth? And -- because some dealers were indicating that now they are clubbing the true value sales and the new value -- the new sales as a business opportunity for themselves and from the same location.

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [77]

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We have True Value outlets of course, separate outlets as well. And also, of course, at the point of sale, especially for exchange cases, people do make inquiries about used cars as well, and also dealer tries to sell the exchange. Therefore, it's selling of new car in exchange of old car. Not only in the showroom, but in the workshop as well. So I think that part is what is exciting. And most dealers are looking forward to increase the penetration in the preowned car business.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [78]

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And one last thing on other income, if you can help us understand. So I presume this quarter, there is definitely a negative mark-to-market, which has affected us. Is it possible to quantify to understand what is the normalized or annualized yield that we should assume?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [79]

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No, there is no negative mark-to-market. Mark-to-markets were certainly much higher in the earlier quarters. This quarter, there is still a positive mark-to-market, but much less than what it was in the second quarter. And therefore, to that extent, the other income is lower. See, you know what our surplus investments are on an average, and the yields today in the market is anywhere between 7 -- 6.5% to 7%. So returns will be in that vicinity of 6.5% to 7%, depending on the surplus that we carry.

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Chirag Shah, Edelweiss Securities Ltd., Research Division - Research Analyst [80]

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And from the taxation perspective, we still have this beneficial tax rate?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [81]

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So yes, it's still efficient. Because the normal tax rate is about 25 point -- 20%. And this comes to anywhere between 12% to 15% depending on indexation.

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Operator [82]

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We take the next question from the line of Joseph George from IIFL.

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Joseph George, IIFL Research - Assistant VP [83]

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Just wanted a clarification. Did you mention that the impact on margins because of the lower production in this quarter compared to sales was about 100 bps?

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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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Yes, that's right.

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Joseph George, IIFL Research - Assistant VP [85]

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All right. Okay. Just a couple of questions. One was, could you give us a sense of how the mix of replacement sales versus first-time buyers is maybe on a YTD basis? And how it compares to same time last year? Just wanted to understand whether the mix has shifted during the slowdown?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [86]

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I'm sorry, I was a little distracted. Can you repeat that question, please? I'm sorry.

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Joseph George, IIFL Research - Assistant VP [87]

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I'm looking for the mix of replacement sales versus first-time buyers in your sales mix this year compared to same time last year.

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [88]

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Well, it hasn't really substantially changed. So first-time buyers are -- continue, of course, across the models, it is different, between 47% to 49%. The replacement buying has actually come down a little bit. So it's in that range 23% to 25%, and the rest is additional buying.

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Joseph George, IIFL Research - Assistant VP [89]

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Understood. So -- and you're saying on a year-on-year basis, it hasn't moved much, right?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [90]

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Yes, it hasn't. The additional car buying -- I'm sorry, additional car buying has come down a little bit and the replacement, which is the exchange of cost gone up a little bit.

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Joseph George, IIFL Research - Assistant VP [91]

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Got it. And the last question that I had was, just wanted a clarification on -- I think this topic has been touched upon in the past. But when you calculate discount per car, which is a INR 33,000 number you gave for the quarter, the denominator here is wholesale volumes, and the numerator is the total discounts on the entire retail. Is that right? And to that extent, it's overstated in 3Q because retails are higher than wholesale. I just wanted to get that.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [92]

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It's like a running cycle. So every time, in a quarter where retails are higher, this will speak up. And there are certain quarters where wholesales are much higher than retail. So you'll find it much lower. So I think you have to look at year's average because they're a more meaningful number because this will carry on. So if you're looking at 1 quarter, you look at what the average of 9 months is or 1 year is, you'll get a more meaningful number.

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Joseph George, IIFL Research - Assistant VP [93]

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Sure, yes. So -- sir, so conceptually, would it be right to say that this quarter's margins have been negatively impacted because of higher discounts, would that be a right assumption? Or...

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [94]

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Obviously, one of the reasons is much higher discount this quarter. So if discounts were at the normal levels, margins would have been higher by another 180 or 130 or 140 basis points, yes.

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Joseph George, IIFL Research - Assistant VP [95]

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So basically, the differential between wholesales and retail would have impacted margins, right? To the extent.

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [96]

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Right. This quarter, yes.

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Operator [97]

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We take the next question 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 [98]

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Sir, just first a clarification. You said this would be the last month for diesel production to no more production in Feb or Feb would be the last month?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [99]

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Yes, this is the last month production.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [100]

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Okay. And second question, I mean, if you can just highlight your new launch plans what could we expect from Maruti over the next, say, 6 to 12 months. And additionally, I mean, to add to this point, Kia Seltos is almost like an almost 50% volumes are in petrol. Does this give us some encouragement to launch a bigger sized SUV?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [101]

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Of course, on the product front, it's difficult for me to give you forward guidance. However, we have indicated for the near future, we have indicated the models, which we'll be launching, which was the Brezza petrol BS VI. This is the first time we are coming with the Brezza petrol. Also, the S-Cross petrol also, as you know, is only in diesel. And we will also have a launch of the Ignis in the next month.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [102]

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Okay. And the related question on the large SUVs?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [103]

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As I said, forward guidance is difficult for me to express.

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [104]

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Okay. Okay. And sir, I mean, it would be difficult to highlight what kind of volume growth you're looking for next year, but should we assume that the decline is behind us, and we should end in the positive territory? Or does the diesel ramp down hurt us in FY '21 as well? What would be the initial estimates from your side?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [105]

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You're looking for the industry estimates or Maruti Suzuki?

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Ronak Sarda, Systematix Shares & Stocks (India) Ltd., Research Division - VP of Auto, Auto Ancillary [106]

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Industry and Maruti, both for FY '21.

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [107]

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For industry, I'll be more forthcoming. For the industry, I think, generally, we had that SIAM session where there was this discussion. The economists have indicated that it would be roughly between 3% to 5%, the increase. And the industry has indicated around a similar figure, although a higher figure for the SUV segment and a lower figure for the passenger car segment.

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Operator [108]

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We take the next question from the line of Sahil Kedia from Bank of America.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [109]

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I have two questions. Firstly, on the other expenses, you mentioned that the royalty number is 5.4% and, for Maruti, it is 3.8%. So when we look at our other expenditure that you have, that will reflect the 5.4% or the 3.8%?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [110]

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3.8% because the balance 1.6% that I've mentioned to you would get reflected in the material costs.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [111]

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Okay, correct. So that 1.6% is -- okay. So that is what I wanted to check. Secondly, sir, when we move to BS VI, you've historically shared localization levels, et cetera, and that has been a key area of focus in the past to drive raw material costs lower. Is it fair to say that the localization levels on the BS VI for some parts may be actually lower, which then may be an area to work for in terms of margin improvement next year? Or is the localization levels of BS VI comparable to BS IV?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [112]

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Yes. Mostly comparable BS VI to BS IV. A large chunk of the cost that has gone up is in the precious metal in the catalyst.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [113]

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Okay. Sir, could you give us a little bit of color in terms of what your localization levels would be this year at an average? And if you've actually managed to change that localization at all on a year-on-year basis? I'm not looking from a quarter perspective, more from a full year number?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [114]

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So direct, if we talk about only Maruti, we are at about 96% localization, which is 4% import. If we include vendor imports, we would be close to 87% local, 13% (inaudible) .

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [115]

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And how would this have changed on a year-on-year basis?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [116]

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Over a period of time, I think we've improved that 13%, now we have come to more like 11% and 12% now. So it's close to 89% now.

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Sahil Kedia, BofA Merrill Lynch, Research Division - VP [117]

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Okay. And last question, sir. This quarter's tax rate of 22%. Should that be something that would now be a normalized tax rate to expect for the company?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [118]

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Yes, that's right. That's correct.

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Operator [119]

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We take the next question 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 [120]

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Firstly, on realizations, there is a drop of about 5% to 6% Q-o-Q. Apart from the discounts and lower proportion, would mix be the major reason for the reduction in the realization?

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Ajay Seth, Maruti Suzuki India Limited - Sr. Executive Officer of Finance, Corp. Planning, Company Secretarial, Legal, Internal Audit & CFO [121]

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That's right. So there are 2 reasons, one, as you already pointed out, discount, and the second is mix. As the diesel proportion is going down in the percentage and also, I think, the sales of lower-end models are more than some of the other superior models, to that extent the realizations' ASPs have been affected. So part of it is discounts and the remaining part is mix.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [122]

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Another question was like discounts have reduced in January, and price increases have been aggressive yesterday. In few models like Alto, Celerio and Ignis, the price increases have been on the higher side. Does the demand situation give confidence for these price increases? Any outlook you can share for FY '21?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [123]

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For the volumes, you mean or...?

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [124]

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For volumes, sir.

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [125]

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I just indicated the industry sort of expectations. So I would, of course, expect our petrol volumes to go up significantly. As you know, our market share in Petrol segment is close to 60%. So with the petrol new launches, which we are doing in Brezza and S-Cross and also the more competitive pricing position we have now with regard to BS VI pricing by the competitors, I think our volumes for petrol should go up significantly.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [126]

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Understood. Can you share any update on the plans of strengthening dealership network? Any update on purchase of the land parcels and leasing them out to dealers?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [127]

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Not really because we are just looking at -- we are consolidating, of course, as you may be aware that we have increased our network this year as well. In fact, if you look at our network increase this year, I'll just give you the numbers as well. We have added, for example, in now, our total number of arena, this thing is 2,700 total thing, which is a net addition of about 81 in this year. So we have added the impact net of this thing. So we have added about 86 outlets already. So we have aggressive plan going forward. As you know, our long-term assessment for the market is we are quite bullish on India for the long-term market, and we are planning our network accordingly.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [128]

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Next, Q-o-Q, sir?

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [129]

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One second, I don't have that immediate data of this thing. But I think the last -- I can give you the exact number a little later while we continue with the conversation.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [130]

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And can you share the details for the quarter.

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Shashank Srivastava, Maruti Suzuki India Limited - Head of Marketing & Sales [131]

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For the quarter, yes. So for Q3, our retail figure for Q3 is 501,200 units.

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Operator [132]

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Thank you. Well, ladies and gentlemen, that was the last question for today. On behalf of Maruti Suzuki India Limited, that concludes this conference. Thank you all for joining. You may now disconnect.