Maruti Suzuki India Limited (MARUTI) Q2 FY24 Earnings Concall Transcript

Maruti Suzuki India Limited  ( NSE : MARUTI) Q2 FY24 Earnings Concall dated Oct. 27, 2023

Corporate Participants:

Pranav Ambaprasad — Senior Manager, Corporate Strategy and Investor Relations

Ajay Seth — Chief Financial Officer

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Analysts:

Pramod Kumar — UBS — Analyst

Kapil Singh — Nomura — Analyst

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

Gunjan Prithyani — Bank of America Merrill Lynch — Analyst

Binay Singh — Morgan Stanley — Analyst

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Chandramouli Muthiah — Goldman Sachs — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q2 FY ’24 Earnings Conference Call of Maruti Suzuki India Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Pranav Ambaprasad. Thank you. And over to you, sir.

Pranav Ambaprasad — Senior Manager, Corporate Strategy and Investor Relations

Thank you, Ray. Ladies and gentlemen, good afternoon once again. Welcome you all to the Q2 FY ’24 earnings call.

Before we begin, 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’d also like to inform you that the call is being recorded, and the audio recording and transcript will be available at our website. You may please note that in case of any inadvertent error during this live audio call, the transcript will be provided with the corrected information.

The con call will begin with a brief statement on the performance and outlook of the business by the Chief Investor Relations Officer and Executive Officer, Corporate Planning, Mr. Rahul Bharti, after which we’ll be happy to receive your questions.

I would like to invite our Chief Investor Relations Officer, Mr. Rahul Bharti. Over to you, sir.

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Thanks, Pranav. Good afternoon, ladies and gentlemen, and thank you for joining us.

I’ll start with an overview of the industry sales performance, followed by the business performance of the company. Quarter two of this year has been a reasonably good quarter. Industry clocked its highest ever quarterly wholesale volume of over 1.07 million units with a year-on year growth of about 5%. Sales volume for the company in the passenger vehicle segment grew by about 8%, higher than industry growth, led to a gain in the market share for the company by about 120 basis points.

In the industry, the share of utility vehicle segment continued to expand. In quarter two, the share of SUVs increased about 50%, which was about 43% during the last financial year. Together, with MUV, the share of UV in the industry is now around 60%. In terms of fuel mix, CNG vehicles continued to see strong demand and the share of CNG vehicles in the industry has now reached about 15%. Share of diesel vehicles continued to decline and is now about 17% as compared to 19% during the last financial year. Interestingly, hybrid vehicles sustained a good traction and now the share of hybrid vehicles have increased to about 2%.

Let me also share some of the business highlights for the company. During the quarter, the company clocked its highest ever quarterly sales volume of over 552,000 units. After about eight quarters, the company could avoid a production volume loss on account of semiconductor shortages. Going ahead, the company is cautiously optimistic on semiconductor supplies.

With the easing of electronic component shortages, production volume improved and the pending orders at the end of quarter two have come down to about 288,000 units, and further corrected to about 250,000 today. Diverging demand patterns between utility vehicle and the small car segment is continuing. The company is working on increasing the flexibility in operations to produce vehicles as per the evolving market demand.

With an overwhelming response to its products in the SUV segment, the company achieved market leadership with a market share of about 23% in SUV segment during the second quarter. The company is already a leader in hatchback sedan, vans and MPV segment and now SUVs also. All the four SUVs; the Brezza, the Grand Vitara, Fronx and Jimny, have contributed to the company, taking the leadership position in SUVs in India.

In quarter two, financial year 2023-’24, exports volume for the company grew by about 9.7% over the same period last year. With exports of about 69,000 units, the company continued to be the largest exporter of passenger vehicles from India. SUV models such as the Grand Vitara and the Fronx were also contributing to the growth in export volumes. Recently, the company further expanded its product portfolio for exports, with the start of exports of the Jimny 5-door. The vehicle will be shipped to destinations in Latin America, Middle East and the Africa.

Going forward, the company plans about a three-fold increase in exports volume to about 750,000 or 800,000 units by the year 2030-’31. As you are aware, the company is also now integrating SMG, the Gujarat plant with itself. This will help the company enhance its agility and eventually, the competitive position in a scenario where the company will be operating at multiple locations through the country and manufacturing vehicles with multiple powertrain technologies.

The company has shared a presentation with the stock exchange for investors, proxy advisors and analysts for better understanding of the proposal. On 17 October, the company put up the proposal for shareholders’ approval. The voting will remain open until 16 November for shareholders to exercise their voting rights.

I now come to the highlights of the second quarter financial year ’23-’24. In the quarter, the company recorded its highest ever quarterly sales volume; net sales, operating profit and net profit. The company sold a total of 552,055 vehicles during the quarter, registering a growth of 6.7% over the same period previous year. Out of the total sales volume, 482,731 units were sold in the domestic market and 69,324 units in the export market. In this quarter, the company registered net sales of INR355,351 million, a growth of 24.5% over quarter two of last year. Growth in net sales outpaced the growth in sales volume due to a higher contribution of utility vehicles in total sales volume.

The average selling price in this quarter grew by about 15% over the second quarter last year. The net profit for the quarter rose to INR37,165 million from INR20,615 million in the second quarter, a year-on-year growth of over 80%. This was on account of higher sales volume, cost reduction efforts, favorable commodity prices and higher non-operating income. In this quarter, as you might have observed, that almost all the positive factors combined would give us a good result.

Highlights of the H1 now, first half of the year, financial year ’23-’24. For this period, the company also recorded its highest ever half yearly sales volume, net sales and net profit. For the first time, the company surpassed half yearly sales mark of 1 million units. Total sales in H1 were 1,050,085 units, a growth of 6.6% over the first half previous year. Sales in the domestic market were at 917,543 units, and exports were at 132,542 units. The company registered net sales of INR663,803 million in the first half. The net sales in the previous year first half were at INR538,298 million. The company made a net profit of INR62,016 million in the first half this year as against INR30,743 million in the first half of the previous year.

With this, we are now ready to take your questions, your feedback, any other observations that you might have. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Pramod Kumar from UBS. Please go ahead.

Pramod Kumar — UBS — Analyst

Yeah. Thanks a lot for the opportunity. The first question is actually a clarification on the quarterly results. A, just wanted to check are there any one-off gains or one-off items, which are lumpy which are kind of lifting our margin profile for the quarter.

And second is a clarification on the change in inventory position that seems to be quite significant this quarter and does it have any bearing from accounting standpoint on the margin numbers what have been reported for the quarter?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

So Pramod, there are no one-offs as such. I mean, with the possible exception that commodity cycles and forex keep on varying, that we have to keep in mind. In terms of inventory, the wholesales were at 466,469, about 467,000 and retails were at 432,450. And so wholesales were slightly above retail. And this is expected because we need to build inventories in the middle of the festive season. We still have [Speech Overlap].

Pramod Kumar — UBS — Analyst

Sorry. Rahul sir, I’m sorry to interject. Apologies. But I was more referring to the P&L line item of change in inventories, not the physical inventory at dealers. Basically, there is INR800 odd crores inventory movement item in the P&L, which is reducing your RM to sales ratio. Just wanted to understand the accounting intricacies there because there is some confusion because we got some client feedback that this explains a big chunk of the margin expansion, that INR815 crores. So if you can just help us understand this from accounting standpoint, whether does it have any one-off impact or any impact whatsoever on the underlying profitability of the company for the quarter.

Ajay Seth — Chief Financial Officer

So Pramod, let me answer this. Number one, let’s clarify. I think this question is being asked by many investors. Let’s clarify that there is no one-off or exception in the results. Movement inventory is a regular feature. Inventory keeps getting adjusted every quarter, and there are ups and downs and there are small elements of adjustments that happens, which are very marginal in nature and not very significant in nature. So it’s a usual practice that the inventories, which comprises of either the finished goods, work-in-progress. Basically, both finished goods and work in progress, which will keep changing every quarter. And to the extent of absorption of fixed cost incidents, there could be some impact on the inventories. But that’s not so significant and it’s a regular feature. It happens every quarter. So if we were to see compared to last year, it is flat. If we were to see it sequentially, there will be some impact of inventory built up, but that is also not very significant. So let me clarify that the results either do not have any one-offs or have any significant impact of any healthy adjustment on the results.

Pramod Kumar — UBS — Analyst

And Ajay Seth, thanks a lot for clarification and just to make it even more clear. So for the volumes what we’ve done and for the mix what we’ve done and where the commodity and other elements are, this is kind of the margin what one can expect. Ceteris Paribus, the 12.9% margin, what you’ve reported, everything remaining constant, everything remaining steady state. This would be the kind of profitability what you would have with this volume and this kind of a mix and whatever discount levels. Is our understanding, right?

Ajay Seth — Chief Financial Officer

So let me clarify that given — in the current context, given the current mix and the current situation that we are in with commodities, forex and the mix that I mentioned earlier and the discount trajectory, so the margins are very much what it is. How it will move forward will depend on all the variables? That we’ll have to see in terms of commodity costs, foreign exchange as well as the mix. If they remain constant — as you rightly said, if everything is constant then, of course, the change would not be there. But if anything changes, then the margins will accordingly move up or down.

Pramod Kumar — UBS — Analyst

Fair enough, sir. And sir, if you can just help us understand the discount number for the quarter, average discount and the export revenue that would be really helpful? And then I had one follow-up question on the demand side, general demand color. Yeah.

Ajay Seth — Chief Financial Officer

Discounts were about INR17,700 per vehicle approximately, and export revenue was about INR4,333 crores.

Pramod Kumar — UBS — Analyst

Okay. And sir, on the demand side, we’ve heard Shashank Srivastava on the business channels recently. Just wanted to understand if you can provide some regional color on the demand, urban versus rural, geographical spread? Because what you understand is South is a bit weak-ish because of the weak monsoon, especially for some other categories. So if you can just help us understand and get some more granularity on the demand what you’re seeing in the festive so far? And also going into Dhanteras and then Diwali, how is the inquiry frequency booking conversion ratio? Or how is the demand scenario looking for the rest of the season, sir?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

So, demand has been fairly stable at the current levels for some time and of course, geographical mix always exists. The central zone of the country, I mean, for example, Delhi-NCR, Rajasthan, Madhya Pradesh, they are doing fine. Even South is doing fine. East has some weakness. Maharashtra in some parts, where there are the effect of rain, etc, there, there is some weakness. But across the country, I mean, industry is growing by 5%. We had mentioned in the beginning of the year that we will grow faster than industry this year. So we gave out a projection of about 10% growth in this year.

So, that is the outlook. In the festive season, half of the festive season is — generally will define from Onam to, let’s say, till about five days, six days after Diwali, let’s say Bhai Dooj. So till now industry has grown by about 20%. And in the balance — overall festive season should grow by about 18% year-to-date.

Pramod Kumar — UBS — Analyst

And Maruti should do better?

Ajay Seth — Chief Financial Officer

In line with industry.

Pramod Kumar — UBS — Analyst

In line with the industry. Thanks a lot, sir. I’ll fall back into queue. Thanks a lot.

Operator

Thank you. The next question is from the line of Kapil Singh from Nomura. Please go ahead.

Kapil Singh — Nomura — Analyst

Yeah. Hi, sir. Could you talk about the various elements or how much was the benefit from each of the elements for the margins like forex, commodity and cost reduction if we compare to Q1?

Ajay Seth — Chief Financial Officer

Kapil, sequentially, as we mentioned, I think the major benefit has come from the commodities and the cost-down that we have been able to achieve. There has been a significant softening in the precious metal commodities, and there we have seen a lot of reduction on the cost on account of that. Steel also has reduced, but not so significant reduction in steel compared to what we’ve seen in the precious metals. So, that’s one major impact that we see compared to — sequentially compared to the first quarter, plus the effort of cost reduction, which carries on, adds on to this basket of commodity reduction as well. So that’s the most significant portion. Also, the mix and the volume increases also helped us in terms of both, operating leverage, as well as achieving higher margins as we see. So that’s the second piece.

The third piece is, if you remember in the first quarter, we had said that there were some one-offs in the employee cost as we had given some retention policies, etc, which is not there now. It will not be repeated in the next quarters and therefore, there’s a reduction in employee costs as well because of that one-time item going away. Advertisement costs also have been slightly lower than what they were in the first quarter because of launches and also we had our conferences, which added on to the costs. So, these are primarily the main reasons. There is also — sales promotion cost is slightly higher as Rahul had also mentioned that we were about INR17,692 now in the second quarter. We were INR16,214 in the first quarter, so marginally higher. But if you add up these numbers, then this gives you a clear signal of the margin trajectory where it has gone from first quarter to second quarter.

Kapil Singh — Nomura — Analyst

Sure, sir. Very helpful. And also how should we think about interplay between margins and market share from here on? Also if you could talk about the breakdown for the order book between some of the key models, how much order book is there and what is the normalized level of order book that we used to carry pre-COVID? Did it used to be about one and a half months, one month? So just some color on that. Are there models where we — basically trying to understand if there are models where we need to raise production or current supply is sufficient?

Ajay Seth — Chief Financial Officer

On your first — I’ll answer the first question and Rahul will take on the second question. On margin and market share, we continue to work on both sides. I think it’s very important for us to improve our market share. I think we’ve been saying that, that we are now gradually going up and we will surely like to see ourselves recovering to that 50% mark at some point in time. It’s a tough task, but we are very committed to work towards that. So that’s very important.

At the same time, we keep a very close watch on our margins as well. As you must have seen that while we have grown our market share, we’ve also grown our margins. So, I think it will be a constant war between margins and market share. As a company, we’ll work on both sides. We’ll work on market share improvement, as well as ensure that through various initiatives that we need to take, we also keep our margins intact. So, there are many, many initiatives also internally that we are facing now to see that in the long term, we are able to also work towards our margin improvement.

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

On the second part on the order book, we have about, as of maybe yesterday, about 2.5 lakh units. CNG accounts for about 123,000 out of this. Then it is fairly — Ertiga is one major model with about 73,700 units pending orders. Then we have the Brezza, the Grand Vitara, the Jimny, Fronx, Invicto. So, a large part of it is on the new SUVs, which have been recently launched.

Kapil Singh — Nomura — Analyst

Sure. And what I was trying to understand is, do we need to raise production for certain models or broadly the supply is good enough now? And what were the normalized level of order book that we used to have pre-COVID? Was it one and a half months, one month, where it used to be?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

See, ideally, in the best interest of the customer, we should have bare minimum order book. The customer should not have a waiting. Financial investors see it as a positive, but it’s customer inconvenience also. The customer should not be allowed to wait. There are some models, which do have a constraint, for example, the Ertiga. The CNG no longer will have a constraint. So, we would like to improve along as we go along and the inventory position is also fine. I mean, we are about at — slightly above one month, so that is comfortable.

Kapil Singh — Nomura — Analyst

Thank you so much. I’ll come back in the queue.

Operator

Thank you. The next question is from the line of Raghunandhan NL from Nuvama Institutional Research. Please go ahead.

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

Congratulations, sir, on stellar numbers. Sir, firstly, on the 16% growth seen in the festive period so far, can you indicate how the urban versus rural growth was?

Ajay Seth — Chief Financial Officer

Rural was slightly higher than urban, and so far it continues healthy.

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

Thank you for that. And recently showcased near-production model of eVX was impressive. There was another model, eWX. When is the global launch expected there?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

We have to keep in mind that’s a concept. And one can never be sure whether it will be launched or not. One can never be sure whether — if at all, there’s a production version, it will be close to the concept that is displayed. So generally in motor shows, a concept is a designer’s language, way of expressing his imagination and to test and get consumer feedback also. So as of now, nothing can be said on that.

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

Sir, continuing the point on launches, Nexa channel has benefited from several launches. Would there be more focus on Arena channel going forward?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Both the channels have their brand definitions, and we need to be true to their brand definitions, while ensuring that in terms of economics, both get — both sufficiently utilized and not overloaded. So it’s a balancing act that we keep doing all the time. And we have to keep in mind that the model development time is — lead time is about four years. So at any point of time, there are models in the pipeline. So, that planning is a continuous exercise. But yes, we would like to keep both channels healthy.

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

And can you indicate the capex plan, sir, for ’24-’25? Would it be around that INR7,000 crores to INR8000 crores because first half, the spending seems to be on the lower side?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Difficult to predict because [Speech Overlap].

Ajay Seth — Chief Financial Officer

We have yet to finalize our plans for the next year. So once we do that, we’ll be able to give you a better idea.

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

For the current year, sir?

Ajay Seth — Chief Financial Officer

Sorry?

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

For the current year, sir?

Ajay Seth — Chief Financial Officer

Current year, we should be above INR8,000 crores.

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

Got it. Just last clarification. On the gross margin, would you see any impact of commodity inflation. Recently, steel prices have gone up. Would that impact Q3?

Ajay Seth — Chief Financial Officer

Steel is something that we are worried about. So, we will have to see how the steels pan out. There can be some increase that you can see on account of steel, although the precious methods continue to soften. So, we’ll have to wait and see overall what impact does steel have and what impact does other commodities have, positive or negative. So steel definitely is going up a little bit compared to what it was this quarter.

Raghunandhan NL — Nuvama Institutional Equities. — Analyst

Thank you so much. Very helpful. I’ll fall back in the queue.

Operator

Thank you very much. The next question is from the line of Gunjan from Bank of America. Please go ahead.

Gunjan Prithyani — Bank of America Merrill Lynch — Analyst

Yeah. Hi. Thanks for taking my questions. I had two questions. Firstly, a follow up on the gross margin. Is there any FX benefit that is worth calling out compared to 1Q to 2Q? And similarly, on the margin, the comments that you made that we’ll have a closer eye on margin now along with market share, is the current level of margin something that we’ll endeavor to maintain, assuming there are not extreme volatilities in commodity? Of course, that’s something we can’t call. But is this a margin level that we are focusing to maintain? Or you think the aspiration is to even improve on the current level? So little bit your thoughts on how should we think about the sustainable operating margin in the business.

Ajay Seth — Chief Financial Officer

So on sequential forex movement, it’s not significant. It’s very marginal. There is some benefit, but very small, fraction. So that’s not any significant number to consider. On the second question, I think it is very important is — see, it is very difficult to predict margins for a longer period because so much is changing in the industry. We are talking about capacity expansion in the near future. So, there will be 2 million capacity that’s going to go up. We are also talking about transiting to EV over the period of next six years, six new models coming in. So what we’d have to see what is the change in mix that happens over a longer period? How do we cope up? What are the pricing? What is the market at that point in time? So it all depends on all these variables.

So to give you any indication, I mean, these are — other factors are more temporary like commodities and all this. It will depend on where they move, at what point in time and how do we adjust, while we’ll continue to work on costs. But these are some major factors that we will have to see how they pan out in the long run and how do they impact the margin. Because what’s very important is how fast we scale up once we grow to INR4 million and what is the operating leverage at a given point in time. What is the fallout of the EVs? How are the margins in that trajectory? So, all that will give you a kind of a feeler in the long run in terms of where the margins move. Very difficult to say at this point in time.

Gunjan Prithyani — Bank of America Merrill Lynch — Analyst

Okay. What I was trying to understand is that the current level of margin, of course, there will be this capacity, which will come through and that it will affect the margins in the short term. But the idea was that we’ve seen so much volatility over the last two years, three years. And now the business is sort of stabilized. And underlying margin should — what we’ve reported in Q2 is something that is something which is sustainable, is what I’m trying to understand. There’s no — capacity is at least a couple of quarters out. But in the interim, as long as the business is at these levels, a double-digit operating margin is sustainable.

Ajay Seth — Chief Financial Officer

So, we had all the positives in this quarter. We had everything, which was positive. It’s very unusual in a quarter that you have all that is positive. So every quarter you will have some or the other variable. which will not work in your favor.

Gunjan Prithyani — Bank of America Merrill Lynch — Analyst

Sure.

Ajay Seth — Chief Financial Officer

So, I think we had an exceptional quarter this time and there was not a single element which was negative. And that brought us to the level where we are. So as I mentioned earlier also when this question was asked that if everything remains constant and nothing changes, then, of course, we are here. But if there are any changes in any other factors, the margins will accordingly get impacted.

Gunjan Prithyani — Bank of America Merrill Lynch — Analyst

Okay. Got it. Fair enough. And the second question I had was on these comments on small car market, which has been weak. Now, two-part question here. One is what is the underlying issue as per you? What is really driving the decline in this segment? And is it just that the first-time buyer is still not coming back? Or just that the design preference has completely changed and the small cars are no longer relevant? What is your reading in that? And how are we trying — incrementally, when I think of next two years, three years, how are we trying to still fix the underrepresentation that we have in the SUV segment? We’ve had good launches. But how should I think about portfolio panning out over the next two years, three years?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Sure. So, small cars are a phenomena of affordability, and affordability means both cost and income. The cost has gone up disproportionately because of regulatory intensity you have seen in the past few years. And the income in this segment of the demography has not taken off. We are hoping that sooner or later the income growth in India will catch up, and sometime the small car segment will revive. It’s not — there are some explanations that the customer is upgrading. A person who can afford a bigger car would always have bought a bigger car. That would have been true in India for a long time. So it’s purely an affordability issue in this segment.

And as you rightly mentioned, it has declined for us. It used to be about 34% of our portfolio. Now it is about 28%. If we look at the customer profiling also, we can see a similar reduction in the first-time buyer. Almost a 10% reduction in the percentage of first-time buyers in the market, so closely correlated. We are hoping that when income growth in this segment of the population catches up with the increased cost and the regulatory intensity does not move up further in the next few years, at some point of time, this segment should come back

Gunjan Prithyani — Bank of America Merrill Lynch — Analyst

Anything on the portfolio, how it pans out?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Sorry, I missed your other question on SUVs. So, we’ve announced also in our Annual Report that currently from about 17 models, we’ll move up to about 28 by the turn of the decade. So definitely, new model additions have to take place. And being a market leader and a volume leader, we have to cater to all segments where the market growth is. So wherever the market growth is, we would like to enrich with more model refreshment.

Gunjan Prithyani — Bank of America Merrill Lynch — Analyst

Okay. Got it. Thank you so much.

Ajay Seth — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Binay from Morgan Stanley. Please go ahead.

Binay Singh — Morgan Stanley — Analyst

Hi, team. Thanks for the opportunity, and congratulations on good set of numbers. And just a clarification from just what Rahul [Technical Issues]

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Please tell me. Tell me, Binay.

Ajay Seth — Chief Financial Officer

I think he has…

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Disconnected?

Ajay Seth — Chief Financial Officer

Looks like.

Operator

We seem to have lost the line for Binay. We’ll move to the next question. The next question is from the line of Jinesh Gandhi from Motilal Oswal. Please go ahead.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Hi, sir. Couple of clarifications on margins. So this quarter, you indicated about benefit of a softening in precious metal. Would it be fair to say the full benefit is not yet fully reflected in 2Q, given that meltdown was far more second-half phenomenon on 2Q? And do you expect further benefit on that side?

Ajay Seth — Chief Financial Officer

Majority of the benefit is seen in the second quarter.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Okay.

Ajay Seth — Chief Financial Officer

But the benefit has already come in the second quarter. But we’ll still see some softening in the commodity — precious metal commodity prices. And if they continue to soften, then, of course, the prices may further go down. But on the contrary, the steel prices are going up. As we mentioned that, we will have to see the basket of commodities, not only just the precious metals, but also steel is almost half the commodity basket. Both of them pan out in the second quarter.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Okay. Okay. And similarly on forex side, so we have seen a very smart move on JPY-INR which, given our vendor imports comes with a quarter’s lag. So do you expect that to be a reasonably favorable factor going forward? As you indicated in 2Q, we had limited benefit on forex side.

Ajay Seth — Chief Financial Officer

Yes, we had continued pressure [Phonetic] against the dollar and currently close to about 150. Last quarter, I think we were at about between 115 and 140 [Phonetic] and 145. So, there could be some benefit of forex that we can see depending on how the final rates end up in the third quarter.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Right. Right. And last clarification is on capex. So, you indicated INR8,000 crores in FY ’24, typically close to about INR5,000 crores in second half. Does this INR8,000 crore also include SMG’s capex which they are doing on the EV capacity as well as battery plant?

Ajay Seth — Chief Financial Officer

No. No, this is purely capex of MSIL’s.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Okay. And now given that we are proposing to take over SMG, what kind of capex SMG would be doing in FY ’24?

Ajay Seth — Chief Financial Officer

So, that has to be taken in account after we finalize the budgets. That exercise is already on. Once we do that, then we’ll know what the capex for both the companies would be.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Got it. And in Suzuki’s presentation, which was uploaded couple of days back, there was reference of increasing capacity for a battery electric vehicle at SMG. Any sense on what kind of a capacity addition is happening over and above 750,000 capacity of SMG?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

We’ll have to look at the market demand and then decide.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Okay. Because there was INR3,100 crore [Phonetic] capex earmarked for that. So, I thought that might have been finalized. Okay. No worries. Cool. I’ll come back in queue.

Operator

Thank you. The next question is from the line of Binay from Morgan Stanley. Please go ahead. Binay, you may go ahead with the question. Binay, can you hear us? You may go ahead with the question.

Binay Singh — Morgan Stanley — Analyst

Hi, team. Thanks for the opportunity. My first question is just out of curiosity, like when you talk about drivers of good margin, we’ve not talked about mix, your SUV share going up. So is that implied? Or you think that it’s actually not a big driver for margins?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

So, we talk about blended margins overall for the company and these factors keep on changing depending upon the market conditions, which segment is doing and growing in how much demand. And so this keeps on changing. So that’s the reason we don’t look at this factor much.

Binay Singh — Morgan Stanley — Analyst

Secondly, just when we look at the overall demand environment, we talked about 18% growth in festive season, 5% growth for the whole year for the industry. So how do you tie up this sort of wide range? Is the festive demand predominantly driven by order books being fulfilled because there was production issues earlier because there’s a big divergence between the two numbers?

Pramod Kumar — UBS — Analyst

Sorry. What is it that you’re trying to reconcile, which number?

Binay Singh — Morgan Stanley — Analyst

Like, for example, the festive Y-o-Y growth we are talking about is 18% for the industry, whereas the actual whole car demand for the year, we are talking about a 5% growth. So in that sense, huge range, right? Like 18% is a very good growth number. 5% is a more moderate. So, how to sort of — because one is obviously that there were order backlogs. So they are getting exhausted now. But anything else that you think is causing this divergence between these to be so widely different?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

I would say it’s slightly more complex than it appears because customer behavior, it’s difficult to model. They might postpone or prepone their purchases. It might be a geographic issue. It might be a segmental issue. But you’re right, the overall annual industry growth of 5% is what is a reality. And even though we are saying that all factors were positive this month and industry grew, you have to keep in mind that over a five-year period, we have grown at a CAGR, whether you take Q1 or you take H1 — sorry, Q2 or H1, our five-year CAGR has been close to 4%.

Binay Singh — Morgan Stanley — Analyst

Right.

Ajay Seth — Chief Financial Officer

So it’s not something too — for a developing market like India, it’s not something too great. And even this year, industry is growing 5%. If Maruti Suzuki is growing higher, it may be a market share phenomena, but overall growth is not happening much.

Binay Singh — Morgan Stanley — Analyst

Yeah. In fact, coming to the small car segment as your SUV share is rising, we are seeing that your first-time buyer share is dropping down. So, that also sort of addresses the fact that it is a more first-time buyer recovery delay, which is hitting small cars. But as a company, what are you trying to do? Because it’s a big segment for Maruti, right, small car? How are you trying to sort of bring the customer back? Anything on — because even the product launch momentum on that side seems more muted versus the SUV side. So what is the company thought on how to sort of get that segment going again?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

So from our side, we can make exciting products. We can work on the total cost of ownership, both the capital cost and the running costs. We can leverage our network, for example, make [Technical Issues] proximate and affordable. But beyond the point, we’ll have to just wait for the market to revive.

Binay Singh — Morgan Stanley — Analyst

Right.

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

So, I think sooner or later, this segment has to revive. Let’s keep in mind that the top 3% of India today owns a car. So if the car market has to grow, more people have to move from the 97% club to the 3% club. Sooner or later, it has to happen. There are crores of people who own two wheelers, who at some point of time will upgrade to cars. It might get delayed by a few years, but it has to happen sooner or later. So, we are in it for the long term. Unfortunately, we have volumes, so we are committed to all segments.

Binay Singh — Morgan Stanley — Analyst

And just lastly, on discounts in the festive season, is it normal levels? Like in Q2, discounts are almost 2.7% of sales? Or are they inching up in Q3? Just last question. Any comments on discounts in Q3 versus Q2?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Just the usual.

Binay Singh — Morgan Stanley — Analyst

Okay. Great. Great. Thanks a lot for that, Rahul. Thank you.

Operator

Thank you. We’ll be able to take one last question. Last question is from the line of Chandramouli from Goldman Sachs. Please go ahead.

Chandramouli Muthiah — Goldman Sachs — Analyst

Hi. Good evening, and thank you for taking my question. My first question is just on the fungibility of capacity. I think the company has close to 2.3 million units of annual manufacturing capacity. And as we shift the mix of production towards larger vehicles or SUVs, just wanted to understand how fungible the production lines are? If we need to make more SUVs, would that have some short-term or medium-term impact on the absolute volume and capacity that we have, the 2.3 million units?

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

So you’re right. We have discovered this in the recent past, and one of the reason our margins had dipped were because we were producing cars that were not selling. And the cards that had demand, we did not have sufficient capacity. So if we had flexibility of both, whether it is semiconductor supplies or in-house production, we would probably have had lesser of such a problem. So it’s a conscious move. We are increasing the flexibility of our production operations. It does come at a small cost because then you are working on a slightly sub-optimal format of production. And the reason of SMG integration is also this. One of the reasons is this that it give us flexibility and agility to respond to market changes in demand, etc.

Chandramouli Muthiah — Goldman Sachs — Analyst

Got it. That’s helpful. And my second question is on the comment you made earlier on the call that by 2030, we are targeting to do about 750,000 units of export units. That’s almost a tripling of what the current annual run rate is. You also mentioned that you’re looking at selling more units into slightly higher income economies, Middle East and LatAm in addition to Africa, which is maybe a more moderate income sort of economic area. So, would this imply that versus the current mix, where maybe we sell more small cars in the export market, over time, we’re looking to sell more premium vehicles, more SUVs for markets like LatAm? And really just trying to understand how the mix might shift in your export business unit.

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

The export ASP is only marginally higher than the domestic ASP. And the top three selling models, for example, in exports, are not SUVs, they are Brezza and the Dzire and the S-Presso. And it’s a very diversified portfolio. We are exporting to about 100 countries of the world. At any point of time, some country or the other would have some problems or some policy barriers, either in some protectionist color or because of some economic weakness. So it keeps on changing. It’s a very dynamic situation. But our focus continues to be, as you rightly mentioned, Africa, LatAm, Southeast Asia, even Middle East, but even — I mean, barring U.S., we will be there everywhere, almost everywhere, barring U.S. and China.

Chandramouli Muthiah — Goldman Sachs — Analyst

Got it. Thank you very much, and all the best.

Rahul Bharti — Chief Investor Relations Officer and Executive Officer of Corporate Planning

Sorry, I made a mistake. The first one is Baleno, not Brezza, the highest export model.

Chandramouli Muthiah — Goldman Sachs — Analyst

Got it. Got it. So Baleno, Dzire, S-Presso. That should be the sequence that we should keep in mind. Got it. Got it. Thank you so much, and all the best.

Operator

Thank you very much. We’ll take that as the last question. [Operator Closing Remarks]