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Maruti’s discounts in Dec quarter break all previous records, erode margins

The previous highest discount offered by the company per car sold was in the July-September quarter at Rs 25,761 aggregating to a direct loss of Rs 805 crore

January 29, 2020 / 11:55 AM IST
Maruti Suzuki Ertiga | 3 stars | The second car from Maruti Suzuki, the Ertiga scored three stars for adult occupancy. The car does still manage to get three stars for child protection though.

Maruti Suzuki Ertiga | 3 stars | The second car from Maruti Suzuki, the Ertiga scored three stars for adult occupancy. The car does still manage to get three stars for child protection though.

 
 
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Maruti Suzuki doled out average discounts of Rs 33,000 on every car it sold during the October-December quarter, the highest in its 37-year history as it battled slowdown and heightened competition.

The previous highest discount offered by the company on each car sold was in the July-September quarter at Rs 25,761 aggregating to a direct loss of Rs 805 crore.

The Delhi-based car market leader recorded 2 percent increase in domestic sales during the reporting quarter to 413,698 units. The total discount outgo during the December quarter was also the highest ever at Rs 1,365 crore.

Maruti increased discounts substantially in December to counter competition. For instance, discounts on the compact sedan Dzire was increased to Rs 65,000 from Rs 55,000 in November. The Dzire competes with the newly launched Hyundai Aura.

The Maruti Brezza, for instance, is not available in petrol even as its rivals, Hyundai Venue and Tata Nexon, have a significant share of petrol variants. The diesel engine-powered Brezza was sold at discounts of more than Rs 90,000.

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The increase in discount levels has not been in line with the business outlook given by the company in the second quarter where senior officials said that discounts would likely go down by an unspecified amount after Diwali with the progressive replacement of Bharat Stage IV (BS-IV) stocks with BS-VI stocks.

Since their first introduction in April 2019, Maruti Suzuki has sold more than 500,000 units of BS-VI models. There are 10 models (all petrol) on offer that are powered by BS-VI engines. But, due to market pressures, even the BS-VI stocks - which carry more expensive technology than BS-IV models - had to be sold at discounts.

Such abnormal levels of discounts dearly hit margins of Maruti in the December quarter. Though there was an increase of 5 percent in net profit, the company missed street estimates with its EBITDA margins closing at just 10.2 percent as against the analyst expectation of 11.2 percent.

On a recent conference call with analysts Ajay Seth, senior executive officer of Finance, Maruti Suzuki said, “If discounts were at normal levels, margins would have been higher by another 180 or 130 or 140 basis points.”

Despite weak consumer sentiments, Maruti Suzuki has gone ahead with a committed price hike in January. The company increased prices by up to 4.7 percent (Rs 1,500-10,000 per car). This has pushed discount levels downwards.

Shashank Srivastava, Head of Marketing & Sales, Maruti Suzuki India Limited, “Discounts 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 Rs 5,000 to Rs 7,000, and in fact, excess of Rs 17,000 for some of the models.”

Maruti is ramping up its petrol offering with introduction of Brezza and S-Cross lined-up.

“I would expect our petrol volumes to grow up significantly. As you know, our market share in petrol segment is close to 60 percent. 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,” added Srivastava.
Swaraj Baggonkar
first published: Jan 29, 2020 11:55 am

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